Comeback

Stocks are shooting up today. Why? Well, over the weekend, European leaders followed the lead of Gordon Brown and Britain (who bought up the Royal Bank of Scotland today), announcing plans for equity stakes in banks, and more important, vows to guarantee interbank lending. If that can't grease the skids of the credit market, absolutely nothing can. And since it's a global financial market, this affects Wall Street.

There's also Mitsubishi's buy of a stake of Morgan Stanley, and federal officials guaranteed that stake, protecting the company.

This has appeared to be enough, for now.

As I said a couple days ago, Brown seemed to have the right idea all along, to recapitalize the banks in exchange for equity stakes. Here's Nobel Prize winner Paul Krugman:

This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was.

Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

While President Paulson was concerned with whether any plan fit with a carefully constructed ideology, Brown actually looked at the problem and sought to fix it.

It's important not to breathe a sigh of relief and think the crisis is solved. It's not. There are still systemic problems and a virtual certainty of recession. That requires an entirely different response. Getting the credit markets working again is only a start.