by Laura Conaway

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J. Scott Applewhite/AP Photo

Jefferson takes a bath.

OK, go ahead and worry. The government's idea for saving Wall Street could work out well for you, or ... not. I say that after talking to Raghuram G. Rajan, former chief economist for the International Monetary Fund and current University of Chicago professor.

Rajan talked to us for our Planet Money podcast — I'll post it later today — and he described the Wall Street situation this way:

 

The U.S. government is now working on a plan to rescue Wall Street (meaning investors, banks, investment banks, investment firms, you name it) from the billions of bad debt they now have on their books. This could take something like $1 trillion of U.S. taxpayer money (yours and mine) for a rescue plan that has yet to be designed. Maybe we'd make money on the deal, if we bought bad debt or falling shares in investment firms and they later rise in value. Maybe we'd lose money, if we buy stuff no one wants and it just tanks.

The point is, Rajan says, the U.S. government is about to put the taxpayer through an enormous and involuntary investment in Wall Street, and in the worst stuff on Wall Street, the "toxic waste," largely because:

We're in an election year.

That's what he said. As he see it, the government has three choices. It could look to foreign governments to invest in the banks, which hasn't been working out so great. It could bail the banks out using U.S. taxpayer money. Or it could ask the investment firms to get its own shareholders to pony up. Of those, having the taxpayer foot the bill is the one he'd pick last.

"Election year, need to be seen to be doing something, lots of politicians jumping on — that's why we're doing it as the first thing," Rajan says.

Rajan advocates two steps. First, troubled firms should stop paying dividends — basically, they should shut off the flow of money so they can start to replenish their capital. Second, the firms should turn to investors, who of course are already on the hook, with what's called a "rights offering."

"Essentially, go to shareholders and say, 'I'm going to give you one more share at half the market price,' " he argues. "Shareholders really have no alternative but to put in that money. This would recapitalize a whole bunch of strong institutions. . . . We haven't even started doing the coercion would would be needed to get private sector initiative."

Over the weekend, he says, the picture of just what Congress and regulators have in mind should start filling in. "It really matters how this thing is structured," he says. He's hoping — we all are — that any government bailout will be cleverly designed so that taxpayers don't get skunked.