“Workout vs. Bailout”—or Reconstruction Finance Corporation vs. Resolution Trust

“In view of world financial events, which take new turns every day, it’s difficult to think about more mundane topics that were candidates for this month’s column. Clearly, an inability to identify and evaluate risk has led to an inability to value assets. What follows is the failure of “˜fair value accounting’ and markets themselves. Without markets, it’s hard to “˜mark to market’ in establishing balance sheet value, the outcome of which can mean life or death to an institution. And it’s a short step to a loss of trust that people can repay what they borrow and the resulting unwillingness to lend cash, regardless of how much you have or the quality of the borrower’s credit. These are complicated issues. Do they require complicated solutions?”

With this paragraph James Heskett of Harvard Business School launched an interesting debate, beginning in October, to discuss the role of government in solving the financial crisis. According to Heskett, the “top down” response of the Reconstruction Finance Corporation of the Depression era, rather than the “bottom up” strategy (involving the purchase of individual properties) of the Resolution Trust of the 1980s, might offer a better solution at this point in time.

Is this kind of government intervention necessary? Is it usurping the market’s role? Would the answer be a cautious hybrid solution involving both the government and the market? See what corporate pundits around the globe have to say about it. Make sure you go through the comments, because that is where the actual debate is going on. (Comments will be accepted on the Harvard Business School forum until this Wednesday, Oct. 29).

Sreya Sarkar is Director of the Asset Ownership Project at Cascade Policy Institute, Oregon’s premier public policy research center.