Create a Good 'Bad Bank' to Ease Crisis

Institutions must write down toxic assets to ease larger woes
By Jim O'Neill,  Newser User
Posted Jan 22, 2009 8:44 AM CST
Britain announced a second rescue plan for the country's ailing banks, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold.   (AP Photo/Matt Dunham)
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(Newser) – The world’s banking crisis is entering its endgame, and it’s time to shore up the most troubled institutions using a strategy that worked in Sweden in the 1990s, writes David Roche in the Wall Street Journal. It won't be easy, he warns: "A good bad bank forces banks to write down their bad assets and cleanse their balance sheets with those made insolvent being recapitalized, nationalized, or liquidated by the state."

"The only exit from the credit crisis involves a return to thrift by the overleveraged," and the stopgap measures employed so far are only making the problem worse, Roche contends. It's not enough to expand credit when deflation is looming. "The bad assets will continue to suck resources out of the economic system in the form of zombie borrowers, misallocation and mispricing of capital, public sector debt, and budget deficits."