How Paulson's Plan Might Fail

Hank Paulson wants to buy up bad assets in a reverse auction. The main problem with this is that it is not targeted on the right companies. There are roughly 3 kinds of companies in this crisis:

1. Companies in good shape that don't need a bailout


2. Companies in terrible shape that will probably fail even with a bailout or should not be rescued


3. Companies in bad shape but will benefit from a bailout or need to be rescued

Bailout money should only go to companies in the 3rd group and should absolutely not go to the 2nd group. With Paulson's plan, we're going to be giving money to all 3 of these groups. This will raise the costs to taxpayers much higher than it needs to be. And it risks not having enough money for the 3rd group because we've given so much to the first and second groups.

Whatever bailout plan we come up with, it needs to target the places where it's most needed.