Wednesday, February 11, 2009

Banks & Toxic Assets

When a bank makes a loan, it creates money. If the loan can't repaid (inevitable if housing bubble breaks), under current rules this is a charge against the bank's capital and given the size of the revaluation, it can bankrupt the bank. But this charge against capital is merely a rule that can be changed. In these extreme circumstances, this rule should be suspended and let the banks start over with new loans and get the economy going.
There is no reason to buy these bad loans and put them in a toxic bank at great taxpayer exposure to loses. Let the banks substantially write them off and start over.

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