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Can this be done without creating new, uncontaminated banks to supply credit that has been destroyed by incompetence?

I don't presume incompetence to be at issue. Banking systems operating without little or no regulation always end up have serious banking panics, destroying a large amount of credit.

Whenever there is a systemic problem, those who have been less well managed have a greater likelihood of being on the chopping block, but if all banks had been run more competently, we still would have seen roughly the same result, though perhaps with some reshuffling of the list of which institutions went under when.

On this:

The difference is the taxpayers get the benefit of new credit to the economy without first having to pony up the capital to "recapitalize" the existing banks.

... as it seems likely it would be more capital overall required to capitalize these banks sufficiently that they are not dragged down as the existing banking system collapses around them, it seems that this difference is that providing more capital for an equity stake in newly established banks feels better than providing less capital for an equity stake in existing banks.

The difference is the taxpayers get the benefit of new credit to the economy without first having to pony up the capital to "recapitalize" the existing banks.  It would have the advantage of offering a clear view of what is the necessary cost of winding up an insolvent institution and insuring that the public does not bail out stock or bond holders.

The proposal in the diary does not bail out stock holders ... it dilutes their equity by from 100% to 200% of the amount of shaky assets taken out of the system, and creates a permanent tax on gross corporate profits.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 3rd, 2008 at 11:41:04 AM EST
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