What is to be done?

There are reports this morning of a done deal on Capitol Hill. The degree of concord may again be over-stated.

Nonetheless, the wisest discussion I've yet found of how policy makers might overcome the Wall Street crisis, how they might in the process "save capitalism from the capitalists," is that set out here on the faculty page of a professor at the graduate school of business, University of Chicago.

Dr. Zingales sees the issue as one of an expedited bankruptcy proceeding. In bankruptcy, what happens is that equity is wiped out, and debt is traded for equity. This means that those who had control of the enterprise formerly take the first wave of loss, and those who had lent them money move into the position of greatest risk, and of greatest control moving forward, vis-a-vis that enterprise.

We can not wait for bankruptcy proceedings to move forward in the case of the investment banks of Wall Street. There simply isn't enough time. But that doesn't mean that the principle should be scrapped.

There is no need to put taxpayers on the hook at all. The stockholders of the investment houses at issue must logically take the loss, and the bondholders must step up to the plate, in a way that maintains continuity for the counter-parties of those institutions.

Janet Tavakoli, an influential consultant, the principal of Tavakoli Structured Finance, is echoing Dr. Zingales' message, as she does here for example.

I'm happy to be counted in their number.

[Note: By use of the term "echo" I didn't mean to make a judgement about chronological priority. Ms Tavakoli reminds me that she advocated related views more than a year ago, as here. All who advocate a debt-for-equity swap as a crucial part of the proper government response to this situation are taking the truly capitalistic side, whatever the chronology of it. Call it 'echoing' one another without chronological presumption.]