Bad Bad Bank

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The good people at public radio’s This American Life, who authored one of the best journalistic explanations of the financial collapse, have another installment coming this weekend, an hour long program called “Bad Bank.”

As a tease today, NPR posted a story about a memo written by an economist at Deutsche Bank explaining why taxpayers are screwed. The memo calls to mind a burglar who breaks into your house, takes your television, cuts himself on the way out the window, and then demands that you pay for an ambulance or he will bleed all over your rhododendrons, and sue you for having broken glass in your house. I quote at length, from a memo excerpt posted on MIT professor Simon Johnson’s blog:

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives. We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

Grim. Grim. Grim.