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About That $3-4 Trillion Bank Cleanup

Matt Yglesias makes a useful point in response to my item about the trillions it'll cost to clean up the financial system:

Noam observes that since absent a healthy financial sector it’s hard to imagine an economic comeback, “the only thing worse than spending $3 trillion to clean up the banks may be not doing it.” And that may well be the case. But this is, to my mind, a huge part of the reason why it’s important to keep nationalization firmly on the table as an option. It seems that the public is going to have to spend vast sums of money to clean up other people’s messes. Under the circumstances, it’s vitally important to minimize the extent to which the money winds up benefiting the very same people who made the mess. The rhetoric of “clean[ing] out all the toxic assets” is misleading. We’re not talking about land with toxic waste lying on top of it that’s expensive to clean. We’re just talking about assets that banks paid a lot of money for but that turn out to be worth much less than they thought. You could “clean” them for free—the banks would just need to write down the losses. What they’re saying isn’t that cleanup is expensive, but that bringing the banking system to solvency requires someone to give the banks trillions of dollars to make up for all the losses they squandered.

I don't disagree with this. I think we may have to go the nationalization route, too. I was talking about the cost of doing (or not doing) something in the context of Schumer's "bad bank" proposal, but Matt's right that nationalization would be cheaper.

Still, even that's going to cost real money. If the banks write down all their losses, many of them are going to be insolvent and will need to be recapitalized to the tune of (possibly) trillions. I'm happy to share that cost with the banks' shareholders, who get wiped out if we nationalize them. (And the government would make money when it re-sold the banks to the private sector.) But you still have a massive hole to plug.

--Noam Scheiber