As he watched the credit markets freeze and the economy tank last month, Wall-based economist Robert Angelone and some of his colleagues overseas penned an outline of their ideas and e-mailed it to U.S. and European government leaders.

It called for the countries to buy an equity stake in ailing banks, figuring that was the fastest way to restore banks’ confidence and provide a return for taxpayers.

“In order to make a direct investment, you can do it in a matter of days,” Angelone said.

Angelone’s idea is taking hold. The U.S. and foreign governments unveiled plans last weekend to take equity stakes in banks — the latest in a series of attempts to unlock the credit markets and halt the economy’s free fall.

It seemed to be welcome news on Wall Street, where the Dow Jones industrial average soared over 936 points, a record gain for one day.

The Bush administration on Monday revamped its plan to loosen the credit markets, calling for the government to buy stakes in financial institutions — as Angelone proposed — and to insure some bank debt for three years, according to a person briefed on the proposal.

The government may spend as much as $250 billion for equity stakes in banks and other financial companies. The government would not get a vote on the boards of directors of the institutions, an industry source said.

Under the revised plan, the Bush administration would greatly expand protections for the U.S. banking system, an industry official said Monday night after banking executives and top federal officials met to revamp the largest bailout plan in the nation’s history. President Bush was to announce the expansion this morning.

The meeting followed an announcement in Europe that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.

The direct-investment idea helped spark a rebound on Wall Street. The Dow Jones industrial average closed at 9,387.61 Monday, up a staggering 936.42 points, or 11.1 percent.

Analysts noted that bond and credit markets weren’t open Monday because of Columbus Day. But other stock indexes posted similar gains. The Standard & Poor’s 500 index was at 1,003.35, up 104.13 points, or 11.6 percent. And Nasdaq was at 1,844.25, up 194.74 points, or 11.8 percent.

If the direct-investment plan works, it will be the latest I-told-you-so moment for Angelone, who predicted the coming financial storm in January and has turned into a valuable resource for Congress.

“I’ve run a few things by him on the economy,” said David Kush, a legislative aide to Rep. Christopher H. Smith, R-N.J.

Kush has had no shortage of economists offering advice. “Bob seems to have had it right before a lot of people were talking about it.”

Angelone, 51, has operated the Epicurus Institute, an economic consulting firm that works mostly with restaurants and small businesses, since 1978. He has a master’s degree from the London School of Economics and a doctorate from the University of Rome.

This year, he has observed a country in crisis, offering prescient commentary as banks, stung by bad mortgages, stopped lending to each other and to customers so completely that it threatened to devastate the global economy.

On Jan. 4, he wrote: “A storm is coming.”

On July 15, he wrote: “Our economic system depends largely on faith and credit, and unfortunately, without the former, the latter means nothing. That faith we have in the U.S. government’s ability to preserve and protect the economy is shaken, and stirred.”

On Sept. 14, he wrote: “There will be an economic collapse on Wall Street, no matter what either (Federal Reserve) Chairman (Ben) Bernanke or (U.S. Treasury) Secretary (Henry) Paulson do at this point. It is inevitable. The question is, does it have to be globally catastrophic or can it be controlled?”

By then, Angelone and colleagues in Europe had begun to study the best way to prevent a disaster.

The Bush administration and Congress decided to spend $700 billion to buy toxic mortgages from banks, but Angelone quickly came to a sobering conclusion: It wouldn’t work fast enough.

The federal government essentially would have to create an asset-management company from scratch. It had to figure out which assets to buy, appraise them, buy them and set up auctions to sell them to investors. And the economy was deteriorating by the day.

“The concept was not going to work because it would take too long to implement,” Angelone said. “If you set up auctions, that’s going to take months to get started. We realized the economy was not in the mood to wait months.”

Angelone and his colleagues had an alternative: They called for governments to infuse enough capital in banks to cover distressed loans. It would give banks confidence in each other’s balance sheets so they could begin lending again. And the governments could sell their stakes when the banks recover, allowing taxpayers to recoup their money.

They submitted it to the U.S. Treasury Department, the Federal Reserve Board, members of Congress and government officials in Great Britain. At first, it seemed the idea was falling on deaf ears. But days later, they were emboldened to see the central idea of their plan take hold.

“I think it’s a big improvement over what (the U.S. government) had,” said Ray Carey, president of the Carey Center for Democratic Capitalism, a think tank in Middletown, and the former chief executive officer of ADT Inc. “The payback will be better by taking an equity stake.”

Unresolved issues remain. Should the government be represented on the board of directors of a bank that takes taxpayer money? (Angelone thinks so). Will home owners facing foreclosure be able to keep their homes? (Angelone thinks about 20 percent will). Will the emotion of the political campaign get in the way of a rational solution. (Angelone fears it will).

“No one party is responsible,” Angelone said. “They’re all responsible. Everyone in this country is responsible for this mess.”

Bloomberg News Service contributed to this story. Michael L. Diamond (732) 643-4038 or mdiamond@app.com

Reprinted from The Asbury Park Press – October 14th, 2008.