Whatever the final provisions of the financial rescue plan, its main priority should be the recapitalization of banks and cash infusions to restore liquidity, writes Edmund Phelps, 2006 Nobel Prize winner in economics in a recent opinion piece in The Wall Street Journal.
The Nobel laureate says that "right now our banking industry is barely operational." Any delay in the restoration of the banking system will be risky and costly.
"Cash transfusions in return for warrants are a good way to do it, and let the taxpayers share in the upside," Phelps urges.
Although recognizing that banks need liquidity, Phelps also blames the banks in large part for the current crisis.
This is "not just an old-fashioned banking crisis, but also a banking scandal," he says.
"Most of the big banks were shot through with shorterism, deceptive practices, and self-dealing."
The system must not be restored to its previous condition, Phelps insists. This will "leave it dysfunctional."
The remedy Phelps proposes is simple.
"We must institute basic changes in corporate governance and in management practice to restore responsibility and honesty for the sake of the economy and for the self respect of the country," he writes
"To prosper and advance, the American business sector is going to need a financial system oriented toward business, not home ownership."
Billionaire George Soros, chairman of Soros Fund Management, also says the banking system needs to be recapitalized.
Writing recently in the Financial Times, Soros says banks must have the needed cash to start lending again to restart the country's economic engine.
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