With all due respect I think you’re misreading my post. I cite several other authors (including an economist) who suggest that Krugman has ignored the politics. This is my point. I am not suggesting my read of the politics differs from his. I’m suggesting he hasn’t even considered the politics. He has a blind spot.

Should you believe me? Do I know something Krugman doesn’t? That’s not for me to decide. I’ve expressed my opinion and linked to that of others, both those that support mine and those that do not. You can read all you like, make your own judgement, and write your own blog. Let me know when you do. I’ll read it.

I did go check your paper as the brief summary of your conclusion (posted here on the 2nd of April) resembled my intuitive opinion about PPIP.
By using the (very) standard corporate finance formulas, I found your paper lost its appeal: Although the fundamental message (subsidies going to unsecured creditors) might not be totally false in the the strict sense, reading this paper made me wonder what you were actually trying to achieve. Just like a Sudoku, your paper looked like an unchallenging, mechanical little exercise to pass time. Your numbered example certainly did not help your case. If you only wanted to reiterate the essence of such basic pricing concepts as the put-call parity and B-S-M option pricing, you could have said that in less than 50 words. I tried, it works. There is absolutely nothing creative in your paper, I am sorry to say. And, to be honest, its prediction / analysis probably isn´t even accurate in today´s situation.
By staying focused on a rigid, academic view of the world, you mix things that should absolutely be differentiated, especially in today´s world. You talk of banking stocks as if they were rationally priced, based on classical corporate finance theory. You use the concept of volatility in the classical sense, although there is a big difference between volatility as an input in the BSM formula and today´s uncertainty in fair value of mortgage related securities. Do you believe that anyone would ever think of pricing today´s toxic CDOs and ABSs based on their historic volatility? And now which volatility would that be, given that there exists no real market anymore (since 08/07 at least) and that all the fundamental variables have changed? Also, do you believe that any investor out there is actually looking for a long-shot volatility miracle that would spike up the price of toxic assets back to 80cents to the dollar? And of course, who cares about the systemic effects of trying to unclog lending facilities, right?
Seriously, Mr. Wilson, I do not know what you were trying to achieve with your paper. It would have been a nice, entertaining example to use in a freshman classroom. But please, do you really think you have given any type of intelligent contribution to the discussion by writing this paper? If the put-call parity were a valid argument in today´s discussion about a potentially world-changing rescue plan, do you really think nobody would have thought about it?

And please, rest assured: Every economic commentator knows that in the wonderful theoretical world of corporate finance, the shareholders hold a put with strike = face value of debt. The only reason why nobody has mentioned it is pretty obvious, Mr. Wilson.

No, not that I’m aware of. I haven’t heard Geithner or anyone make a domino argument. Further, there is precedent for large players filing actually relieving strains on the market. Anytime you have a clear resolution of a problem, for better or worse, the market will be able to resume functioning with that new data. It’s the uncertainty that freezes markets, not the risk.

Drexel Burnham and LTCM are the most recent examples I can think of.

Also, it may not be that politically infeasible. Here is the comment I left on Krugman’s blog regarding this:

With regard to the political obstacles, I’m not sure how familiar you are with the filibuster rules, but it may be possible to pass many things with only 50 votes. For example, for another round of stimulus all of the government spending could be put in a reconciliation bill, with tax increases so that it’s revenue neutral. Such a bill cannot be filibustered. Then, a separate bill of tax cuts can be put forward. This will take 60 votes, but it will be very hard for the Republicans to vote against it.

If Obama is willing to fight, there are parliamentary tactics he can use to force through many strong measures with only 50 votes.

For more on this see:

http://www.mcclatchydc.com/251/story/64192.html

The fact that Paul’s conclusion may not be “practical”, “politically speaking” hardly seems a devastating indictment, given how relative those terms are, at a minimum.

What is paramount is whether his assessment and prescription are accurate and optimal. The politics of it _should be_ separated, analytically.

If his general prescription is subordinated to ’sub-optimal’ “politiking” of the day, that’s a whole other Oprah, yes?

If the argument against putting insolvent banks into receivership is a *political* argument, then fine…Make.That.Argument. Don’t pretend that there’s some sort of economic justification for what is essentially a political action.

Just make the argument that you really believe in. Everything else is just dishonest, on some level or another.

http://krugman.blogs.nytimes.com/2009/04/02/the-banks-versus-some-banks/