Former Curious Capitalist guest blogger Mark Gimein has been writing up a storm lately at The Big Money, Slate's new business site. I really like his latest piece, about why it's so hard to make money betting against bubbles. A sample:

Bubbles actually punish rational expectations. Andrew Lo, an economist at MIT... explains it like this: "A bubble is a very strong upward trend in prices that is not necessarily based on reason or rationality, and unless one gets the timing just right, it's easy to be crushed by the onslaught of enthusiastic investors." As Lo points out, a lot of fund managers saw a bubble forming and bet against financial stocks in 2005 and 2006. And basically, they got killed.

The walloping taken by those who followed their rational instincts and analysis warned others against trying the same thing. So, as the credit bubble got bigger, fewer and fewer people bet against it. There were exceptions: Hedge-fund manager John Paulson made more than $3 billion betting on the collapse of the mortgage market. But in the main, the lesson that investors took from 2005 and 2006 was that the last place they wanted to be was standing there taking arms against the sea of troubles and betting against the wave.

Okay, it's not a totally original argument. I've never been able to find evidence that John Maynard Keynes actually said, "The market can stay irrational longer than you can stay solvent." But people have been saying he said it for decades. Still, it's a good essay by Gimein. Also, he's blogging now. Aren't we all?

Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was "to inject capital into financial institutions"?

That wasn't how Treasury initially advertised its Troubled Asset Relief Program. It was sold as a way to get the market for mortgage securities moving (or, to use the jargon, liquid). Lots of academic economists objected that liquidity wasn't the problem, it was insolvency. What Treasury needed to do was recapitalize financial institutions and take equity stakes in return.

When members of the Senate Banking Committee pressed Paulson on this two weeks ago, he pushed back. "Putting capital into institutions is about failure," he said. "This is about success."

But Congress went ahead and forced on Paulson a provision that said he had to get equity or senior debt from financial institutions in exchange for taking significant assets off their hands--effectively enabling backdoor recapitalizations. Yesterday Ben Bernanke hinted that a change in emphasis might be in the offing for the TARP. And today Paulson seemed to confirm it.

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A few weeks ago Steve Randy Waldman had a nice post titled Real Capitalists Nationalize. His argument:

The superficially private-sector-friendly Paulson Plan is likely to entail socializing losses and undermining the incentives that give capitalism its efficacy and its legitimacy. Outright nationalization, on the other hand, may look like a Commie statist plot, but strengthens the "invisible hand" in the long run, as long as the nationalization is temporary.

The final version of the bailout law did give Treasury the power to effectively nationalize financial institutions from which it makes big asset purchases. And now, in a development that may be a lot more significant than John McCain pushing a $300 billion plan to buy up mortgages, those ultracapitalist Wall Street Journal editorialists are urging Hank Paulson to use it:

If the feds want to prevent a full-scale rescue of Citigroup, now might be a good time to take Treasury Secretary Hank Paulson's new powers out for a spin. If Citi needs to raise capital, let the Treasury inject some, along with appropriate housecleaning on the management side and upside for taxpayers.

John McCain's announcement during the debate Tuesday night that he wants the government to spend $300 billion buying up mortgages and rewriting the terms was something of a landmark in the national discussion over what to do about our financial mess.

Yeah, it was a half-baked proposal that made no acknowledgement of the fact that Barney Frank and Chris Dodd have already gotten a similar if far-less-bold and far less expensive plan enacted into law (without much help from either McCain or Obama, who missed both the April 10 the July 26 Senate votes on the bill). As the LA Times reports:

According to the outline of McCain's newest proposal, the federal government would pay borrowers and lenders in full, regardless of how wise or fair the original transaction was. Lenders would be able to remove the bad mortgages from their balance sheets, and borrowers would be able to refinance into government-guaranteed loans. Mortgage holders would have to prove they lived in the home and had good credit at the time of the original loan. ...

By contrast, the housing bill passed by Congress over the summer, and which went into effect Oct. 1, required lenders to take a loss by writing down the principal on troubled mortgages to 85% of the house's current value. Borrowers with adequate incomes and credit records would then qualify for refinanced mortgages from new lenders.

Government funds were used only to help finance mortgage insurance for the new loans; cost estimate for taxpayers was roughly $20 billion.

But I'll be generous and take McCain's debate gambit as a sign that there's now clear bipartisan agreement that bigger, bolder actions still need to be taken to right the country's financial ship. Which isn't enough in itself to solve our problems, but strikes me as better than the absence of such an agreement.

Update: The text of the (still half-baked) plan is here.