Twofish's Blog

September 20, 2008

Getting rid of zombies

Filed under: finance — twofish @ 2:53 pm

One might point out that if let banks transfer bad assets to the government, the banks will find the worst assets that they have, give those to the government, and the keep the best assets that they have.

That’s part of the point.

If you don’t do the transfer then the banks have an incentive to make the bad stuff look good.  They will be afraid of doing anything that makes their situation worse, and will try their best to as one common expression goes, “put lipstick on a pig.”  This is bad because you then have zombies within the bank, things are not quite dead, but not quite alive eating up precious energy and money.  Once you have zombies in a bank, then start wanting to eat healthy flesh, and you end up with a situation like Japan.

So to get rid of the zombies, you need to change the incentives so that people will tell you where the bad stuff is rather than covering them up.  So you go to a bank and say, we are going to give you $10 billion dollars for anything that you have, and the bank instead of covering things up, will start throwing the zombies out.  Once you have them all somewhere else, you can see how bad the problem really is, and then decide what to do about it, and who ends up paying for the getting rid of the bad loans.

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