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So my suggestion is that Governments should set up huge investment funds to buy up these assets at current market prices because then the taxpayer also has some prospect of reward should assets prices recover somewhat.
As Krugman and others keep hammering, buying the toxic waste at its "market price" doesn't make the banks any less insolvent. If anything, they can pretend they are solvent because they are not selling the assets and so they can pretend they are worth more than the market would give them for it. The problem of the toxic assets is not lack of buyers, but lack of sellers - the banks can't sell at the market price without instantly realzing losses that would render them insolvent.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:38:43 PM EST
However the objective of my proposal is not to try to make completely insolvent financial institutions solvent - let them go into Chapter 11.   That is a black hole so big it simply cannot be filled with any money Obama and others are likely to be able to raise, and we risk huge inflation if we simply print money to fill that hole.  The objective is to cut taxpayers in on the action at current deflated prices - and thereby help put a floor under further deflation.

Insolvent institutions have no choice but to sell assets at current prices to meet current liabilities - unless we bail them out.  In fact bailing them out helps them to pretend that it is still business as usual.  

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Mar 22nd, 2009 at 06:13:32 PM EST
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As I commented on vets74's diary, I think an AIG Chapter 11 is desirable, even necessary, and impossible.  I don't think the US government has the guts.
by rifek on Mon Mar 23rd, 2009 at 09:08:20 AM EST
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