Good Bank, Bad Bank; Good Plan, Better Plan

There is a growing consensus that Washington has two options if it wants to end the credit freeze and restore confidence in our banking system. One is to, in effect, nationalize the major banks, which would be hugely expensive and would undermine our free-market system. The other is the “bad bank” solution, under which the government would print enormous amounts of money to buy all these banks’ “toxic” assets and to put them into a huge new financial institution that would operate under federal control and sell them off over time. This is a better idea than nationalization, but the proposals along these lines being bandied around Washington would all be prohibitively expensive and probably ignite inflation.