Now that Obama is in office, the conversation about what we should do with all the ailing banks is quickly shifting to what we should do with all the soon-to-be-failing banks. TARP, as we've known for months, is a bust. Meanwhile, the banking sector is still falling apart, largely because no one has a plan for writing down and off-loading all the toxic assets sitting on their books.
One obvious solution is nationalization: have the feds buy part or all of any bank looking like it's about to collapse. Call it Super-TARP--an asset-purchasing plan with real teeth, unlike TARP, which essentially gave banks free money, with no strings attached. But another option being debated is, coincidentally, the one that was ditched last fall in favor of TARP: A Resolution Trust Corp.-like "bad bank" that would force banks to write down their bad assets, but would then buy them and "resolve" them itself (for a great explanation of "bad banks," check out James Kwak's post at the Baseline Scenario). Richard Parsons, the new chairman of Citigroup, likes the idea, while Paul Krugman doesn't. Of course, since this agency would save banks, not help close them, it's not exactly a repeat of the RTC (I explained the differences back in September). Nevertheless, in essence, we're back at square one, with several months and over a trillion dollars wasted.