Mr Congdon, you confuse solvency and liquidity. Some banks are insolvent; no one knows which. Banks fear dealing with each other until the bad banks are identified via failure or are recapitalised. Paulson's plan fails to do the latter. A lower Fed funds rate also increases liquidity not solvency.

James, Pittsburgh, USA

The government should not take over the bad debts that the banks recklessly (some would say fraudulently) acquired. The government could offer the banks loans and capital in return for equity in the bank. The taxpayer could then get a return on their money when the system returns to normal.

Mike, Manchester, uk

For John Smythe: If assets decline in value by 2%, that is a loss to the bank - they'll only recover 98% of the funds loaned. That 2% loss has to be absorbed by capital which declines around 40%. If the bank is liquidated, and only 98% of loans recovered, shareholder's equity declines about 40%.

Mike Isaacs, London, England

American fiasco started in 1977 when President Carter required banks to meet requirements of their ENTIRE COMMUNITY. The Clinton admin in 1977 further bolstered that Community Reinvestment Act urging subprime loans. In 2003 Democrats stopped W.Bush from getting tighter controls on subprime lenders

Ben, Sunderland, England

Massive over-simplification. How much of the 5% equity was down to false earnings in previous years and to what extent were these earnings falsified for personal gain? What is the underlying profitability of banks given their bloated cost base? Instead of zero interest rates they should cut costs.

Steve, Manchester,

Abolish credit cards and put up interest rates to 6%.

m wilson, bidache, France

It would be simpler to lower mandatory capital ratios for two years during which time the government would stand ready to underwrite appropriate rights issues of the banks.

Shares in freshly recapitalised banks are more attractive than toxic securities.

Marek, London,

Ok these securities need to be purchased to get the system going.
Yet the tax payer should not lose money.
Bank shareholders should lose the money(equity), with them and the government taking action to punish the banks management for this mess.
Consolidation of banks and rebalancing is needed

David Shephard, Watford, UK

This entire edifice was built on credit. In a rising asset environment, the Bank posts supernormal returns. In a declining environment, the Bank post supernormal losses. Furthermore, when you use other People's money [Leveraging], you are always dependent on their Kindness a la Blanch Dubois.

Aly-Khan Satchu, Nairobi, Kenya

why would u cut the interest rate to zero? then the banks will only have the money markets to raise money from as there will be no reason to deposit. look at japan, they had zero interest rates and their ecconomy was in the doldrums for a decade.

will, grimsby, uk

Yes, lets pour petrol onto the fire! The whole Anglo-American financial system is currently imploding under the weight of a vast mountain of unpayable debt and your solution is to create more debt? Utter utter madness.

Mark, Leeds,

I think it's the 'yeah, we've been greedy and stupid but you've got to bail us out 'cos you'll suffer if you don't' attitude that rightly sticks in the craw of normally adjusted people.

This must NEVER happen again. We live in a democracy, not a corporatocracy (apparently)

MD, Milton Keynes,

The 2% drop in total assets must be written off against the 5% part the asset that is shareholder equity, not the 95% that is depositors' funds. Depositors fully expect the bank to bear the loss from the bank's operation.

Ann, Hong Kong, China

Zero interest rates!
Money, matress - now!!!

J Grindle, Sidcup, Kent

So many fallacies, so little space!
This bailout is the wrong thing to do as it is continuing the misallocation of resources which were caused by (among other things) the Fed's manipulated low interest rates. Want a wealthier country? Then let prices adjust to where they should be.

Sam, London,

"As loan portfolios decline, so does the level of bank deposits."

Could someone please explain this point. I must have missed something obvious.

Des, Edinburgh,

Thank you very much indeed for that explanation. I wish you'd written it 2 weeks ago!

Ben, newcastle,

I don't get your arithmetic: A drop of 2% of the 95% assets results in 93.1. To maintain the 5:95 capital:asset ratio, the capital drops to 4.9 (i.e. 2% of 5), this leaves a ratio of 4.9:93.1. This maintains the 5:95 capital:asset ratio. How did you work out 40% drop in capital if assets drops by 2%

john smythe, Woking, UK

Very informative article-Thanks. But, with all this added money it seems that it would be inflationary on down the line.

Bryan, Cove, USA

Great explanation. Any chance of a similar one to tell us how the 'Balance Sheet' works, something that's been mentioned on many occasions.

Keith Jones, Reading, England

The solution does not prevent the problem reoccurring or worsening. Bail out required? Maybe. A mechanism to prevent complex strcutured finance products from ever again becoming significant part of bank "assets" is minimum required and still absent from proposals- hence no deal.

Nick, London,

The core of the problem lies with executive compensation. As Mr Congdon says, sometimes banks take too many risks. But why? It's not in the bank's interest; nor its depositors'; nor its shareholders'. One group stands to gain: the executives. They compete to show the most profit, but never lose.

Tom Welsh, Basingstoke,

Why not nationalize all banks, forbid mutuals to become banks, than after a few years denationalize most banks and pay management and dealers salaries comparable to other professions i.e. teachers, doctors, architects etz. Or limit high salaries through taxation a la D Healy.

Peter Kaldor, Woking, U.K.

Providing the Govenrment gets a return on these purchases I see no problem - perhaps they can conyinually impose windfall taxes on the banks until the amount is paid off. In effect the banks have taken out a loan with the Government.

John Wood, Hull, UK

Well done Tim

Finally someone who has explained in plan english and math what is happening.

On a side note, I do not advocate the suspension of mark-to-market accounting by a replacement with mark-to-maturity, this will slow the downward 'death spiral' and reduce the need for new capital

Jason, London, UK

The banks' capital is a finite and known number in billion,but the toxic papers amount is not known
at any time.

Perhaps the government should buy up or increase the banks' capital rather than buying the toxic papers.

abubakarabrahman, Melaka, Malaysia

The bill may or may not get the banks to loan. Even if you think this is the best method we should demand a piece of hide. The gov should get preferred shares in a secondary offering. The first propossal gave us zip, now they say the president will figure something out in 5 yrs ie prior to election

MEaston, Madison, Dane

Mr. Congdon argues that the central bank must "buy up every decent security in sight," yet he then goes on to say that this is the rationale underlying Mr. Paulson's plan to buy $700 billion of the banks' "blighted" securities. And therein lies the rub - - blighted, not decent, securities.

Brian Ragen, Boise, USA

why not just change or suspend the ration of capital to loans until the economy is moving again and then slowly reinstate it as the "crisis" slowly resolves itself. Seems a better solution than buying $700 billion of junk. Now who will the government hire to sort out the loans?? YUP, you got it...

Paul , Euclid, USA

Every US Congessman is up for reelection in 5 weeks. The phone calls from their constituients are overwheming against the bailout... Few Profiles in Courage to be found.. The GOP still finds Ayn Rand as their god.

John , New Jersey , USA

Atten: Tim Congdon. Re: Your column of 10-01-08.
Your column is very informative, but it leaves out the finite solution to this problem. Mr. Paulson, and others proposing the corrective action, have stated that they don't know the answer to this giant problem, but they think a 700 Billion dollar

Kenneth B, Smith, P.E., Wilmington, DE, U.S.A.

Handing out a textbook on the Great Depression to all congressmen might help. Or can't they all read?

Paul Freeman, London, England