Economists say rescue plan still needs work

“I think what we really have to do is repair bank balance sheets," said Jones, of Columbia. "This moves in that direction, but it doesn't seem to me to be an efficient use of our money. It seems like we could do a whole lot more if we invested in direct equity stakes.”

Proponents of buying stock in troubled banks say taxpayers would reap the gains from those shares when the banking industry gets back on its feet.

There’s also skepticism among economists about whether the government needs to move as quickly as the White House has insisted, and whether, by taking more time to work out the details, the plan could be improved.

“We've seen pretty clearly that all the bad things that were promised to happen if the bill didn't pass by Monday, or by Tuesday, or by whatever particular day of the week it might have been —they haven't happened,” said David Levine, an economics professor at Washington University. “If they do happen, they won't happen immediately. There's time to deliberate over a good plan. This is a bad plan. It got even worse since it was turned down by the House. And there’s really very little to like in all of this.”

Since the Treasury submitted its bare-bones proposal to Congress a week ago, op-ed pages and Internet blogs have been flooded with alternative proposals. Some have suggested the government doesn’t need to buy trouble assets outright; assessing a value and offering to guarantee that price could restore confidence and restart stalled lending. Others would like to see the government lend the $700 billion to private investors who want to buy trouble assets.

While the House and Senate have made significant changes to the Treasury’ original proposal, come critics say the plan still has a gaping hole.

“Nobody's talking about addressing the underlying problem. which is all these people defaulting on the mortgages,” said Jonathan Kappell, a professor at the Yale School of Management. “You need to do something to deal with that problem, or six months from now we are going to be sitting here having another debate about the next bailout package when the wave of foreclosures expected in California, Florida, Michigan and Massachusetts comes due."

Kappell thinks the government should use the money to refinance loans in delinquency to levels that homeowners can afford. In return, homeowners would sign over to the government some or all of the gains on their home when they sell it after the housing market has recovered.

“That way, all of the securities that are based on these defaulting loans will all of sudden become valuable again," he said.

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