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Should taxpayers own the good banks?

While many investors in bank stocks and bonds might have been hoping for a more comprehensive bailout plan from US Treasury secretary Timothy Geithner, others will be pleased with his feeble announcement. Their argument is that the sooner insolvent banks collapse, the sooner the system will be restored to health and confidence return. The notion of the government funding a bad bank to buy troubled assets at above market value – God forbid at face value – is the ultimate moral hazard.

 Buiter and Soros: don’t throw good money after bad

Buiter and Soros: don’t throw good money after bad

Groundhog day: Geithner botches another bailout

ING and the Dutch government pass taxpayers the bill

What about reversing the prevailing notion of having the state capitalize bad banks to own toxic assets, so subsidizing surviving good banks, owned by private shareholders and funded by private creditors and depositors, and freeing them to resume prudent lending? What about the idea of the taxpayer capitalizing the good bank, leaving existing private shareholders and creditors to take their chances on recoveries from the bad bank? Willem Buiter, professor of European political economy at the London School of Economics and Political Science, former chief economist of the European Bank for Reconstruction and Development and a former external member of the Bank of England’s Monetary Policy Committee, argues that the state could take on the good and easy-to-value assets of failing banks, plus associated liabilities, and set up a series of new good banks to resume new lending, supported perhaps by government guarantees or insurance.

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