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Market Commentary: Good Bank, Bad Bank

January 28, 2009 – 9:59 pm

  Earnings have taken a back seat to the announcement that the Obama Administration is preparing some type of good bank /bad bank program. The details are missing but it is an effort to remove toxic assets from the balance sheet of banks. The idea is to get the under performing loans off the banks balance sheets thus improving their financial strength but more importantly removing the fear that these assets will take the banks to the road of bankruptcy.  

It is a good idea but no one knows if it will work. The banks made bad loans and maybe there needs to be a rash of banks going under before a recovery can happen. That thinking will prolong the recession or make it deeper which is what the Fed is fighting.  

The more important question is should we do this? The answer is probably. Banking is the life blood of the world economy and that blood is the cash it lends. That lending needs to continue. When good quality borrowers can’t get loans for building, expanding, and short term payroll and financing needs then they shut down and lay off people. That makes everything worse.  

But do we have confidence in our government to solve this problem or will a free economy right itself on its own? Government interference got us in this problem with pressure to loan low income families money to buy homes they couldn’t really afford; a good intention, but economics take no prisoners even those with good intentions.

Good Trading

Steve Peasley 

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