Bush, Paulson take new approach to economic crisis

But things move fast in the bailout world. And in deciding to inject fresh capital into U.S. banks in return for ownership stakes, the administration adopted a plan that many leading economists had been pushing for weeks.

"I--and many others--have been harping on (the banks') inadequate capital for months," said Anil Kashyap, an economist at the University of Chicago's Graduate School of Business.

The latest move follows a Herculean effort by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to win congressional approval last month of the $700 billion bailout package.

That legislation will fund the recapitalization. But the focus of Paulson's initial plan--buying distressed mortgage-related securities to improve banks' balance sheets and make it easier for them to lend again--is now taking a back seat.

The shift in approach suggests the administration had miscalculated the time it had to take corrective action before realizing the urgency of the crisis demanded the swiftest possible response.

Scott Talbott, a lobbyist for the Financial Services Roundtable, an industry group, said he thinks last week's "plunge in the Dow"--its worst ever--convinced the Treasury Department that it needed to move faster.

"Time is now of the essence," Ian Shepherdson, chief U.S. economist for the consulting firm High Frequency Economics, wrote this week in a note to clients. "The authorities do not have the luxury of mulling over the fine details; they need to act now."

Losses on mortgage-related securities have depleted bank capital. Those securities had collapsed in the face of falling home prices and rising defaults and foreclosures. Without sufficient capital, banks have been reluctant to lend, depressing economic activity.

Some economists say Paulson initially opposed the notion of recapitalizing the banks partly out of a bias against government intervention in a private industry.