Is a 'bad bank' a good idea?

To say that times are tough would be an understatement. 401k's have been cut in half, home values have nose-dived, businesses large and small are going out of business, and unemployment is rampant. 36 states have budget deficits exceeding $30 billion. And the majority of banks in this country are saddled with bad assets, primarily as a result from subprime lending practices (which seemed to them an okay idea at the time...). 

Can the government fix the economy?

Sending citizens economic stimulus checks doesn’t help, because it doesn’t address the larger problem of a failing financial system. Shoveling billions of bailout dollars to hold the banks afloat hasn’t worked so far either; much of that money ends up in top bank exec’s pockets rather than back to the people through loans.

The latest discussion now revolves around setting up a national ‘bad bank.’ The government, with the help of private investors, would purchase all of the poor loans and investments that currently reside on the balance sheets of our country’s surviving financial institutions. Pooling together these toxic assets in one bad bank would give the real banks a fresh start; they could begin lending again.

Once the economy is stable, the bad bank would sell off its bad assets, hopefully turning a profit, but potentially suffering a loss.

What a bad bank would mean to consumers

Clean balance sheets would mean the banks can get back to lending. Consumers with good credit could borrow money at reasonable rates for cars and houses, jumpstarting those industries.

Those with bad credit or no credit are not likely to qualify for loans in the same way they did a few years ago, if the banks have learned any lesson at all from the economic collapse.

This all sounds pretty good for responsible consumers, but there is risk involved with the bad bank plan. The government, after all, will be using our taxpayer money to buy up the bad assets from the banks. If it can’t sell these off for a profit when all is said and done, we’ll be the ones who must pay for the poor investment for years to come. We'll be right back where we are now, or perhaps worse off.

Obama and top economists are expected to try and take some of the risk off of taxpayers’ shoulders by asking private investors to pitch in. It’s unclear which investors would be interested in tying up their money on toxic assets; it could be managers of hedge funds, private equity groups, pension funds, or endowments.

The bad bank strategy has never been implemented on a scale this large, so we’re treading unchartered waters here. The U.S. Treasury should unveil more details sometime before April 2nd.

The bad bank plan follows two other attempts by the Obama administration to shore up the American economy: the $825 billion stimulus spending plan and the housing initiative designed to help current homeowners keep their homes. 

If it were up to you, would you back this plan?