Thursday, October 2, 2008

The US bill for a “bad” bank

George Soros also favored the recapitalization of the US banking system in yesterday’s FT rather than relying on the purchases of bad “assets” from the US financial institutions. In Paulson’s plan the bad assets are not real assets but “toxic” packages of claims to real assets. That is why the acceptance of Paulson’s plan will not end the game, but allows it to continue.

In the best tradition of Stalinist central planning, the bureaucrats will continue to decide which institution has no perspective (Lehman Bros) and which will have (AIG). Paulson’s plan does not attract co-financing from existing or potential new investors in the troubled institutions unless the bureaucrats are known to treat the institution in question very generously indeed.

That is why Paulson’s plan will be expensive for the taxpayers, driving the US dollar to a state of permanent undervaluation.

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