Bad Banks

Washington is now mulling over the idea of forming a “Bad Bank” that would buy up some or all of the toxic assets, the unwise loans, encumbering the books of banks and making them unwilling to lend. This might cost up to $4 trillion dollars, involve buying the assets at more than they are worth, and eventually losing money on them – perhaps most of the money – and all with taxpayer money. So the banks would get well, the unwise managers who got into this mess would keep their jobs and fancy offices and outlandish bonuses, the investors would retain their capital, and the only people who get hurt in this are the taxpayers, to the tune of perhaps $4 trillion dollars, give or take the odd billion!

Here is an alternate suggestion: DON'T bail out the banks for their stupid mistakes. Let the banks in the worst shape go bankrupt, or get bought up at fire sale prices by stronger banks, as ought to happen in a free market system. Let the incompetent managements lose their jobs. Let the investors who were unwise or greedy enough to invest in such risky ventures lose their money. Depositors are of course insured, so their deposits are safe.

Meanwhile, form new, government-capitalized banks, or recapitalize some of the remaining sound banks, using all the trillions Congress proposes to use to buy bad assets or bail out failing banks, and let/direct them to begin to make prudent loans to creditworthy businesses and homeowners. Needless to say, the taxpayer ought to get equity in these banks equivalent to the capitalization supplied, so that eventually in better times these shares can be sold off to help pay the enormous national debt we are accumulating (and the law ought to REQUIRE repayment of debt from the proceeds of such sales , else Congress will just see this as more money they can spend).

The current schemes being considered still look to me like Congress bailing out Wall Street to save them from the consequences of their own folly, at the expense of the taxpayer. And the evidence thus far suggests it isn’t doing anything to solve the main problem – that credit is still frozen despite the billions already poured into the banks.