Governments are edging towards a full-scale nationalisation of the banking system. On Wednesday, Hank Paulson, the US Treasury secretary, suggested that buying shares directly in banks is now under consideration in the US. That echoed plans announced by UK authorities earlier that day, when the government said it would guarantee new bank debt (for a fee), swap assets as part of a special liquidity scheme and take stakes in several of the country's largest banks.
The favoured mechanism involves the purchase of high-yielding preference shares, as Warren Buffett did at Goldman Sachs and General Electric. For private investors this approach suits both parties. The buyer pays his money and takes his chances. But for governments it creates significant problems.
First, having stumped up once it may have to stump up again. AIG, the insurer, is set to swallow a further $38bn of taxpayers' money on top of last month's $85bn rescue package.
Second, for a bank to be well run, bureaucrats cannot second-guess management's commercial instincts. And if there are restraints on executive pay – as with the $700bn bail-out package – managers at all but the most struggling institutions will be extremely reluctant to take part. It is hard to imagine inexperienced officials with minority stakes bossing around senior bankers.
Third, if a government ends up with a swathe of banks in its portfolio, conflicts of interest will arise. Should the banks compete aggressively with each other to benefit consumers or ease up to boost profits?
In any case, most US banks insist they have sufficient capital. The Tarp should start to deal with dodgy assets. The problem is that details of how the Tarp will work remain unclear. That should be Mr Paulson's priority. The government should give the Tarp a chance before playing fund manager.