Financial crisis: ah, someone hasn’t completely lost sight of the “core problem”

January 13, 2009

In the midst of announcements of billions of US$ of bailout money across the globe in late 2008 – some of which destined to coddled uncompetitive sectors such as certain car industries that should restructure rather than be allowed to stagnate and therefore retard economic recovery – I had published a small post highlighting what my utterly modest little blogger self tends to believe is at the heart of the recovery. Current countercyclical spending binges to keep consumption going will not be effective if the heart of the matter is not properly addressed, i.e., get the banking sector back on track, not least by getting rid of the bad bank assets that mire its balance sheets. That was the initial idea of US Treasury’s Hank Paulson’s “TARP” $700bn programme, that was ultimately derailed. The cash pot this fund represents is being coveted by various sectors and constituencies that want money injections, paving the road to all sorts of ugly pork-barrel politics. But Ben Bernanke, head of the US’ Fed just “called for fresh efforts to clean up the US banking sector”, so the FT. The paper further reports:

“Raising the possibility that the Obama Treasury might “decide to supplement injections of capital by removing troubled assets from institutions’ balance sheets”, [Ben Bernanke] highlighted three options.

One would be for public purchases of troubled assets (highlighted by me)– the model Mr Paulson proposed. A second would be for the government to provide asset guarantees in return for warrants – used with the Citigroup rescue.

The third would be to “set up and capitalise so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank”.

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