James Kwak´s post “The “Good Bank” Proposal” at Baselinescenario describes an alternative to the Geithner plan, referring to Willem Buiter and Paul Romer (WSJ).
The idea:
“Instead of creating a government entity to buy toxic assets from existin banks – or nationalizing existing banks, removing their toxic assets, and then reprivatize them – why not create brand new, good banks with the same government money, enabling them to lend money unencumbered by previous bad decisions, and then privatize them?”
In detail:
Romer suggests using government capital to create new, healthy banks that can essentially compete with the existing banks, which can then be treated under existing rules and regulations – if they become insolvent, they get taken over; some of their liabilities (like FDIC-insured deposits) are guaranteed, and some aren’t – and that’s that. Buiter goes a step further and recommends taking away banking licenses from the legacy bad banks and making them institutions that just run off their existing assets, in part by selling their good assets to the new good banks.
These are elegant solutions because they get to where we want to be – healthy banks – yet avoid the problem of overpaying for toxic assets (which can happen in many forms, including non-recourse loans and asset guarantees), and the alternate problem of having to take over legacy banks (which will be politically difficult, given the antipathy that “nationalization” generates in the U.S.).
In the end Geithner is thinking very similar. The additional $80 billion from TARP that he proposed as support for the TALF program is designed to support a large and rapidly growing new wholesale bank that is being created inside the Fed. So de facto, Geithner has gone at least partially in the right direction of dedicating TARP funds to new institutions that can increase credit quickly. (The Fed is doing just what a private bank would do, treating the TARP funds as capital and borrowing to buy assets worth about 10 times the capital.) The Fed’s experience also shows how quickly one could build up a new wholesale bank.
