Dean Baker has a couple of interesting points to make about the 'bad' bank proposal. I've already written about the difficulty of coming up with a fair price for these assets. Baker reminds us that, if we paid a fair price, banks' capital would likely be wiped out as we're looking to write off $2 trillion but the banks only have $1.4 trillion in capital, and some of that is goodwill, whose worth is nebulous especially in these times.
Because the problem of bad loans is not fully known, it is likely, in Baker's opinion, that the bad bank will be dealing with new bad loans for a long time.
Baker advocates nationalization of insolvent banks and nationalization today. "This is not interference with the market. It is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can't let them be tied up in bankruptcy proceedings for years."
He has a point. But, I suspect that Geithner and Summers don't agree. We'll be sorry if they don't.
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