Ricardo Caballero, 18 March 2009

Financial markets are not reacting well to the US Treasury’s Capital Assistance Programme. This column fleshes out Ricardo Caballero's plan for raising private capital by leveraging a government-guaranteed price five years from today. This implicit put option should cut out Knightian uncertainty about banks’ health, draw in capital, and avoid excessive government control. If it works, the cost to taxpayers would be minimal.

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