The ‘Good Bank’ Solution

Willem Buiter at the Financial Times writes to endorse the idea of creating government owned and operated lending facilities to replace the insolvent banks:

There is an alternative solution to the problem of valuing the toxic assets. It would not involve nationalising the existing banks. Instead the state would create one or more new ’good’ banks - all state-owned and state-funded to begin with. Effectively, some or all of the existing banks would become bad banks. The good banks would acquire the deposits and the good assets of the bad banks or legacy banks. The good assets are, by definition, easy to value. The creation of multiple good banks may be desirable to encourage competition. One could even create a good bank for every existing bank: New Citi, New RBS, New ING etc.

I posted this a 10 days ago, but he writes better.

The basic point is that the banking industry does not have to be preserved. What has to be preserved is transparent access to credit.