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‘Bad banks’ idea gaining traction

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Kai Ryssdal: By some estimates it’s going to take more than a trillion dollars in new cash to bring the financial industry back to life. A big part of the problem, as Ashley was just explaining, is that banks of all stripes are bogged down with bad debt on their balance sheets. They can’t sell it and they don’t know how to value it. Marketplace’s Steve Henn reports that’s brought back an idea left for dead last fall.

Steve Henn: Ken Kuttner, an economist at Williams College in Massachusetts, says for bankers the past week has felt a lot like a bad horror movie sequel.

ANOUNCER VOICE: I know what you did last Summer.

Or maybe more like last September.

Ken Kuttner: I think we have come almost full circle.

Remember back then big banks were teetering on the edge of collapse and the Treasury Department hatched a plan to buy up billions in troubled assets from banks, like those bundled mortgage loans? By early November, Secretary Henry Paulson abandoned that idea as unworkable. But Catherine Mann, an economist at Brandeis, says that left banks with a big problem.

Catherine Mann: Without knowing what the value of the assets are on the balance sheet of financial institutions they are afraid to do business with each other.

They’re still afraid of making many new loans to businesses. And the value of the loans they already own continues to crumble. So that old idea of buying up troubled assets is back.

Kuttner: You mean the bad bank idea.

The idea is you create one big government funded bank to buy up everyone else’s garbage. This time the Fed Chairman Ben Bernanke and some of Obama’s economic advisers are pushing the idea. But Doug Diamond at the University of Chicago says there is one problem.

Doug Diamond: Getting the price right is close to impossible.

If the government pays too little for these troubled assets, banks could go under anyway. But if it pays too much, taxpayers won’t get their money back. But banks would be more likely to survive. And that, Diamond says, may actually be the best outcome for the economy.

In Washington I’m Steve Henn for Marketplace.

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