Toxic assets

By Roger E. A. Farmer

We don’t need to nationalise the banks. We don’t need to guarantee bad assets. We don’t need government to own voting shares in private banks. We don’t need to create a bad bank full of toxic assets. We just need a little faith in free markets and a little creative intervention. I propose that the central bank should support the price of an indexed fund of bank stocks. 

By Laurence Kotlikoff and Perry Mehrling

As we advocated two months back (Bagehot plus RFC: The Right Financial Fix), Uncle Sam is finally starting to sell systematic risk insurance on high-grade securities in exchange for preferred stock. This is a critical function for the US government; Uncle Sam is the only player capable of hedging systemic risk because he’s the only player capable of taking actions that keep the overall economic system on the right course. 

By Jon Danielsson and Casper de Vries

Neither the recent massive money market injections, the coordinated lowering of interest rates nor the use of public funds to recapitalise banks have done much to restart interbank lending. This action did not solve the underlying problem preventing interbank lending: extreme information asymmetry.