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Sal Khan of Khan Academy May 26, 2009

Posted by thedukeofurl in Economics.
Tags: , , ,

I recently came across a variant of the good bank-bad bank proposals that have been made recently over the past few months by Salman Khan and David Leinweber that they published online on 11 November 2008 – “New American Bank Initiative” – http://cift.haas.berkeley.edu/docs/nabi/nabi-Nov11.pdf.  You can also watch Khan explain this plan to a CNN reporter on video using his own educational ‘tool’ – (http://www.youtube.com/watch?v=_ZAlj2gu0eM). In both the paper and in the CNN interview, Khan gives credit for this particular version of the good bank-bad bank solution of the crisis to a univeristy friend, Todd Plutsky.

Khan has set up a youtube affiliated educational web site devoted to explaining visually and in terms that are easily understood concepts in mathematics, physics, finance and banking, and the current credit crisis – http://khanacademy.org.  In Bailout 14: Possible Solution, Khan shows the viewer the letter he received from Plutsky. He is a brilliant expositor of ideas most people find difficult, and he does it in such a way that you will wish you had come across him before. His explanation of his friend, Plutsky’s, solution to the financial crisis is a model of clarity.

If this is such a good idea, why isn’t it being implemented? You may well ask.  The answer is simple.  The bankers don’t like it (although Citigroup has expressed an interest). And they don’t like it for a very good reason from their point of view.

The toxic assets they possess will be eliminated by being passed onto the ‘bad bank’, which will then be allowed to fail, which means that they will receive no remuneration for these toxic assets for which they overpaid.  It also means that the extent of the toxicity due to their poor management of other people’s money will be publically revealed for the scandal it is.

The toxic waste created by these institutions is estimated by some to be over a quadrillion dollars, which is more money than the world has. It can never be paid off, only written off.  Bankers would rather that no one became aware of this for a certainty, if they even know themselves, and some politicians agree with them, especially those who have “palled around” with bankers in the recent past.


Other more technical discussion of the good bank-bad bank solution are: 1) Reorganizing the Banks by Bulow & Klemperer – http://www.voxeu.org/index.php?q=node/3320 ; 2) Willem Buiter’s How to Set Up a New ‘Good Bank’ – http://blogs.ft.com/maverecon/2009/02/how-to-set-up-a-new-good-bank/ which has links to other discussions of this, including his own development; 3) Buiter’s good bank-bad bank illustration – http://blogs.ft.com/maverecon/2009/03/dont-touch-the-unsecured-creditors-clobber-the-tax-payer-instead ; 4) The Right Way to Create a Good Bank and a Bad Bank by Hall and Woodward – http://www.voxeu.org/index.php?q=node/3132.



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