Will Paulson's Bank Plan Finally Unfreeze Credit?

The longer the credit markets remain dry, the more things are going to die. That's what's behind yet another day of bloodshed on Wall Street, where the market shed 678 points, or 7.33%, in panicky late trading on Thursday. It's also what's behind yet another financial jack-in-the-box move by Henry Paulson at Treasury, who hinted on Wednesday that he was considering using part of the massive $700 billion bailout package approved by Congress to directly buy stakes in banks, after having dismissed the idea less than a week before.

Why the turnaround? It comes down to this: Banks need money. The U.S. government has it. Or can print it. So in addition to the end-around plans to buy mortgage securities and other toxic assets that Paulson and Fed Reserve Chairman Ben Bernanke have been devising, why not go with a more direct approach too?

"A capital shortage is a capital shortage is a capital shortage," says Anil Kashyap, Professor of Economics and Finance at the University of Chicago Graduate School of Business. To Kashyap and a number of economists, this has been the problem from the beginning, and any proposed solution that doesn't address the basic issue of recapitalizing banks won't succeed in the long run. Treasury has now come to the same conclusion, that the best way to shore up both the banks' balance sheets and their confidence in lending " to each other, to businesses, to us " is to become an investor.