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Why A 'Bad Bank' Is A Good Idea

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Why A 'Bad Bank' Is A Good Idea

Economy

Why A 'Bad Bank' Is A Good Idea

Why A 'Bad Bank' Is A Good Idea

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  • <iframe src="https://www.npr.org/player/embed/99790785/99790765" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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The federal government has been struggling with ways to boost the economy by helping U.S. banks resume lending. Those banks have been weighed down by massive amounts of mortgage-backed securities and other "toxic" assets on their balance sheets.

One idea, floated by Federal Reserve Bank Chairman Ben Bernanke, is to create a government-run "bad bank" that would allow private banks to unload toxic assets into a separate institution.

It's a way to "clean up the really bad banks — all the private banks that have problem assets [and] take those problem assets off their books. Think of it as the biggest financial sanitation project ever," says Simon Johnson, a professor at the Massachusetts Institute of Technology's Sloan School of Management.

"If you clean up the banks' balance sheets and create some better banks to resume lending to the real economy, that's the heart of the strategy," Johnson, a former chief economist at the International Monetary Fund, tells NPR's Renee Montagne.

Johnson says the plan has a good chance of working if it's part of a broad, comprehensive approach that includes a strong fiscal stimulus and a program to help homeowners who are struggling to avoid foreclosure.

Credit won't resume growing within six to 12 months, he says, "but over a two- to three-year horizon, this will work."

The government should have no trouble finding people to run the "bad bank," Johnson says. "The good news is there's lots of experienced professionals looking for jobs in the financial management industry right now."