Big zombies

Must . . . eat . . . money

(hat tip: Julia)

Many economists have been warning that the net-worth problems of the banks are a lot bigger than the $700 billion that’s been allocated to deal with them.  Some have said a TARP II, TARP III, etc., to the tune of $2 trillion or so may be necessary to fix the banks once and for all.  Now Dr. Doom himself, Nouriel Roubini, says the banking system is just plain insolvent, and by about $3.6 trillion.  The specter of 1990s-Japan-style zombie banks in the U.S. is no longer a specter but a reality, it seems.

Much of the focus has been on the toxic assets on bank balance sheets and how to properly value them when there’s such a chasm between what banks say they’re worth and what they’d fetch on the market.  Martin Wolf and some others have said this focus is misplaced, because the real problem isn’t valuation but insolvency (hat tip: Jeff Sachse), but in this cause the two problems seem to go hand in hand: at current market valuations of these toxic assets, the banks are hugely insolvent.  Take away the toxic assets and are the banks still insolvent?

Roubini suggests we stop trying to prop up these zombie banks and nationalize them instead, but that’s a topic for another post.  So is Willem Buiter’s idea to create new “good banks,” containing the non-toxic assets of the current problem banks while leaving their bad assets behind in the old banks, which would be allowed to fail.

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