'Good Banks' Are the Cost Effective Way Out of the Financial Crisis

[nodular]

I believe that William Buiter, in a Feb. 21 Wall Street Journal came up with a viable idea that actually could work to contain the current crisis (sorry I am so late to post on this). No, it would not "stimulate our economy" and "end the recession." I really don't think those things are the point. What we need to do now is to prevent a depression. Creating a viable banking system without piling up more than $1 trillion of extra debt---as I believe Buitner's plan would do--- would accomplish the goal, in my opinion, of avoiding a depression.


article, same title as this post, found at http://online.wsj.com/article/SB123517593808837541.html


"One reason the Geithner plan has been poorly received is that the money isn't there to recapitalize U.S. banks as a whole. Mr. Geithner has only $350 billion, what's left of the original $700 billion in the previous administration's Troubled Asset Relief Program. That's nowhere near enough to get Mr. Geithner's proposed Public-Private Investment Fund going on any significant scale. The scale of this investment fund -- $500 billion-$1 trillion -- is an empty wish unless the Treasury convinces the Congress to provide substantial additional resources to guarantee the toxic assets to be valued and bought by private investors.

The truth is that the federal government has little fiscal spare capacity. States and municipalities have, at best, none. With the fiscal boost provided by the stimulus legislation ($787 billion, or about 5.4% of GDP over two years), the federal deficit could easily rise to 12% or even 14% of GDP for the next two years. These are numbers historically associated with banana republics headed for insolvency or hyperinflation.

Rather than wasting the $1.4 trillion of public funds it would take to restore (according to NYU economist Nouriel Roubini's estimate) the capitalization of the U.S. banking sector to its fall 2008 level, it would be better to use public money to capitalize new banks that don't suffer from an overhang of past bad investments and loans -- and to guarantee new borrowing or new loans and investment by these banks. This "good bank" model achieves this by identifying the systemically important banks that are kept afloat only by past, present and anticipated future public financial support ("bad banks") and taking their banking licenses away.

The "stress test" proposed by Mr. Geithner for major banks (assets in excess of $100 billion) could be used to gather the necessary information to identify the bad banks. New banks, capitalized by the government (possibly with private co-financing) would take the deposits of the bad banks and purchase the good assets from the bad banks. Future government support, through guarantees or other means, would be focused exclusively on new lending and new borrowing by the new good banks and those old banks that passed the stress test."




For more similar stuff and others, see my blog Potpourri http://random-potpourri.blogspot.com/