Bad Banks: Bad for Whom ?

Everywhere there seems to be talk of setting up one or more bad bank. Will Hutton is a long time advocate and last week Willem Buiter devoted his FT column to explaining how to do it. As I understand it the basic idea is to split the assets of the existing banks into 'good' and 'bad' tranches, and hive off the toxic debts into a separate organisation which can then be either allowed to go belly up or, according to taste, taken into public ownership and nursed back to health in an explicitly 'Swedish' style. The resulting 'good' banks will then, it is claimed, be better able to start lending again - or, if you accept that they are already lending, to fill the gap left by all those exploding Icelandic and Irish banks which no longer operate on any scale in the UK. That is the purpose of government's re-capitalising them.

All this sounds very technical to the non economist. But Willem Buiter gives the clue as to why it is not:

"The senior debt of many of the institutions that are likely to turn out to be bad banks is often held by institutional investors like pension funds and insurance companies. If and when the old bad banks default on that debt, the holders of the debt obviously get hurt. While that is regrettable, it is surely better that the burden of the losses incurred as a result of past bad lending and investment decisions fall on those who made these decisions rather than on the tax payer."

So, it seems, the pension funds take the hit. But this is not politically plausible - or at least it wouldn't be if enough people understood the politics of this proposal, which I doubt they do. It's a kind of three card trick: the toxic debts of the banks and financial sector get off set against our futures. It's doesn't seem immensely different from the proposal to take a levy on pensions which has recently brought Ireland to boiling point.

Government intervention should be designed to protect people's mortgages and pensions as well as stimulating the economy. It shouldn't be designed to restore the status quo ante for the financial markets. Or at least that's what I thought Labour governments were suppose to be about...but perhaps that's dreadfully old-fashioned of me.

Robin Blackburn has some imaginative ideas for a 'bail out from below' in which the pension funds play a key role. But this can't work if they're stuck with the toxic stock of 'zombie' banks. It's high time these technical solutions to the crisis were discussed more politically.