As we all know, we inhabitors of the world economy -- specifically, western banks, more specifically, American banks -- have a whole bunch of bad assets on our balance sheet. These bad assets are loans that aren't bringing in liquidity on any private market, any time soon. The original bailout plan was for the US government to buy this debt -- to, in effect, create a market (or, a price mechanism) for these bad loans. This was TARP. But then, Sec. Paulson switched gears, and instead of buying the debt, he decided -- following Europe -- to simply inject capital directly into troubled banks, leaving the bad assets on their sheets.
Recently, the idea of the government buying the loans has resurfaced. But the same central problem remains: At what price and according to what motivation? If the government pays the banks what would amount to market values, the banks will receive very little actual help. If on the other hand the government buys the debt at values that return the banks to viable operations, tax-payers will have gotten screwed. This is because tax-payers will not get a return on the assets at the value it would take to return the banks to solvency.
So, what to do?
Again, we are debating government action because there is no private market for the debt. Nobody wants to touch it. Nobody wants to touch any organization or borrower who even whiffs of being close to the debt, hence the so-called credit crisis. Quite a problem we've got. I look forward to seeing what 2009 brings.
My sense is the following. I see 'motivation' as determinative in this instance. Are we motivated by 'free-market' ideology whereby it is wrong for governments to assist banks irrespective of the consequences? Or are we motivated by the consequences? President Obama clearly has his mind tuned to the latter. But there are still Republican congressmen not to mention many Americans who think ideologically, that is, in terms of a socialism-capitalism, bad-good dualism that to me is increasingly outdated.
Once we settle what our motivations are -- if we haven't already, we are close to this point -- we turn to step two: technical execution. I'll say more about that soon.