Sunday, January 18, 2009

Coming full circle on the TARP

A story in the Wash. Post. lays out what the Obama administration is thinking about the credit crisis. Buy bad assets through a "bad bank" is one option, and requiring private investors to match terms of bailouts is the other.

Re buying bad assets, the Post hits what has, I think, been the nub of the problem:

The difficulty is that banks think their assets are worth more than investors are willing to pay. If the government sides with investors, the banks will be forced to swallow the difference as a loss. If the government pays what the banks regard as a fair price, however, the markets may ignore the transactions as a bailout by another name.

Most economists favor an approach in which the government would pay market prices, and then help the banks cover the losses through a program of capital injections.


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