Krugman argues that if the aforementioned plan passes, it would perpetuate the system of heads (profits) -- the banks win, tails (bad loans) -- the U.S. taxpayer loses.

Krugman's better plan: have the U.S. government buy stock in the banks, i.e. nationalize them, at least temporarily. To charges of government takeover of a private sector, Krugman says, "So what?" If taxpayers are rescuing the banks, why shouldn't they get ownership?, Krugman argues, at least until private capital is courageous enough to invest in them.

Capitalizing viable banks, which my BloggingStocks colleague Peter Cohan has also written extensively about, appears more likely to offer a better outcome for the U.S. taxpayer than the much-bantered 'buy the toxic assets' strategy currently circulating through the corridors of power in Washington.

Yours truly hasn't done a multiple-variable regression analysis on the toxic asset pool, but the sense here is that a lot of these assets won't return to par -- although many could appreciate to profitable levels prior to government sale -- which means the government will take a sizable loss on these assets. Better to have more protection for the taxpayer via preferred stock in any bank rescue, hence the preference for Krugman's plan.

An unanticipated task

Still, government majority stock ownership of a large portion of the banking sector does not represent an optimal state, not even for liberals and others who favor an activist government. In a very real sense, it represents government entrance in to private space they hadn't anticipated.

That's because, public resources represent a very narrow segment in corporate capitalism, and many liberals were counting on those public resources being deployed in areas where there is almost no chance the private sector can achieve fairness, namely in health care and education. In short, with only so many tax dollars to go around, every dollar spent on the banks is one less dollar for health care and education reform / improvements.

Keynesians and other liberals expected the next cycle of liberalism to build on the current economic system -- via public policies to make it more just, while retaining the private sector's many benefits -- not to have to patch large leaks in the current system. But it is patch, we must, if the nation hopes to return to sustainable economic growth.

Financial Editor Joseph Lazzaro is based in New York.