All Big US Banks Must Go to Fix Crisis: Economist
News Editor, CNBC.com
The creation of a government bad bank to buy toxic assets is necessary, but then the government will need to take control of and restructure major banks to fix the system, one economist at the World Economic Forum in Davos told CNBC.com.
"They have to do a bad bank," Harvard Economics Professor Ken Rogoff said. But "if that's all they do then it's idiotic."
Institutions like Citi and Bank of America will have to go, boards will have to be fired and equity stakeholders will be wiped out, Rogoff said.
The plan could mirror the one Sweden implemented, where all troubled banks were nationalized, their balance sheets were cleaned up and the good parts of the businesses were sold to the private sector.
That solution was "much cleaner," he said.
Sweden’s banks were effectively bankrupt in the early 1990s, but the government pulled off a rapid recovery that actually helped taxpayers make money in the long run.
The government placed banks with troubled assets into a so-called bad bank, where they could be held and then sold when market and economic conditions improved.
In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending, but wiped shareholders out in the process.
Officials from the Obama administration are holding around the clock meetings with senior Wall Street executives on how to create a new government bank to buy bad assets from major financial firms.
However, people with direct knowledge of the talks tell CNBC there is no consensus on how such an entity would work or whether a plan could materialize any time soon or possibly ever.
Jobs Won't Come Back this Year
Looking to the overall economy, it unlikely the job market will improve this year, Rogoff told CNBC.
"I'm afraid unemployment is going to keep rising until at least 2010," he said.
The US is in "a very deep financial recession" and in those situations unemployment rises for almost five years, he added.
US housing and jobless claims data on Thursday showed there was no end in sight for the gloomy economy, while Japan's industrial outlook plunged by a record pace in December, contributing to the bleak picture of the world slowdown.