The Economy — Your Debt or Mine?
“I mean, any bank that wants to remove toxic assets from its balance sheet can do it at a stroke - just declare them worthless, and poof! they’re gone. But of course, that would reduce confidence and capital, not increase it - and that’s not what Hank and Ben are talking about. They’re talking about turning the assets over to Uncle Sam, and getting cold hard cash in return. And then the question is how much cash they get in return. It’s all about the price.
Now, if the price Treasury pays is very low - anything comparable to what financial institutions are able to sell the stuff for now - it’s going to do nothing for confidence and capital. If the price is high, confidence and capital will improve - but taxpayers may well take a big loss.”
The second piece is the trade-off — it really is a genuine bail out — there’s no sugar-coating it here — taxpayers will literally be buying up worthless investments so that banks can get rid of them, investors will like the banks more, give them money, which they’ll then lend out and the problem is solved. The only bad part is that this all costs $700 billion (or over $2300 per US citizen). Other people say that if the US were to borrow this money, it will increase inflation, which could arguably hurt consumers more.
If anybody has time and an ipod (and who doesn’t these days), download the “Planet Money” Podcast from NPR. They are quick 25-30 minute episodes that offer good insight in plain terms –
