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Want to End Crisis? Seize Banks and Chop Them Up

Posted Apr 21, 2009 12:10pm EDT by Henry Blodget in Investing, Recession, Banking
Related: ^dji, ^gspc, xlf, c, wfc, jpm

The Obama administration wants to fix the banks the same way the Bush administration did: by handing them hundreds of billions of dollars of taxpayer money and hoping they eventually nurse themselves back to health.

Dozens of economists have blasted this policy, arguing that it is both ineffective and unfair. The banks will only acknowledge their losses a little bit at a time under this plan, their argument goes, so the taxpayer's commitment is bottomless. Also, because the banks have every incentive to try to work their way through the crisis (on the taxpayer's dime), the resolution will take years.

There's a better way, says Simon Johnson, a senior fellow at the Peterson Institute for International Economics:

Seize the banks, write down the value of their assets, and then re-privatize the core operations.

The Obama administration refuses to consider this option, arguing that it will be too expensive. This is bunk, says Johnson. The real reason is that the Wall Street firms have too much influence in Washington. See earlier:

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