I wrote about my idea of 'My friend the economist and my dumb question' here on 23rd January. I'm now in very good company. From Willem Buiter at the Financial Times on January 29, 2009 "The 'Good Bank' Solution"

There is an alternative solution to the problem of valuing the toxic assets. It would not involve nationalising the existing banks. Instead the state would create one or more new ’good’ banks - all state-owned and state-funded to begin with.

From Nobel economist Joseph Stiglitz on 02 Feb 2009 at Davos. "Let banks fail" reported in the Telegraph.

“the government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice”.

From George Soros on 04 Feb in the WSJ "We Can Do Better Than a 'Bad Bank' "

... about $1.5 trillion is likely to be required to recapitalise the existing banks properly. This money could be leveraged a lot more effectively if most of it were injected into the new good banks, unencumbered with the toxic waste of the existing banks.

From Paul Romer in the WSJ on 06 Feb "Let's Start Brand New Banks"

Everyone agrees that the United States urgently needs a few good banks. Turning bad banks into good banks is a difficult and risky way to get them. It's simpler and safer to start entirely new banks.

And from Willem Buiter again at the Financial Times on 08 Feb "Good Bank/New Bank vs. Bad Bank: a rare example of a no-brainer" rounding up the ongoing discussion:

I claim no authorship or originality for the ‘good bank’ proposal. The idea is obvious and no doubt was floating around the blogosphere and elsewhere as soon as the magnitude of the insolvency disaster in the banking sector became apparent.

The US, the UK and several other continental European countries are at risk of emulating Ireland, where the government first guaranteed all the liabilities of the banks (other than equity) and only after that began to nationalise the banks. This leaves the Irish government today in the not too enviable position of having to choose between sovereign default and bleeding the tax payer and the beneficiaries of normal public spending to make whole all the creditors of the banks.

I want to tell you a little about a friend of mine. He's got a PhD in economics and has been lecturing for years. From time-to-time I say to him: "Can I ask you a dumb question?" He always replies with a wry smile "Answering dumb questions is practically my job description." We had one of our chats last night:

ME:

I keep hearing:"Strong banks are essential to our economy." But surely, they should be saying: "A strong banking system is essential to our economy." The 1st statement leads us towards bank rescues and nationalisations. While the 2nd gives us more options.

My friend the economist:

Yes that is more accurate. In fact, I was studying in Finland in 1992 as a series of banking collpases swept across the Nordic countries. Many of the possible options were tested with varying success. Go on..

ME:

Well, I don't know if this option was available in the past... Why not establish 2 brand new internet-only banks in Ireland. And capitalise them with the €15bn. For that, you get 2 new banks. Each starting with a clean sheet. Free to borrow. Free to lend. The advantages are you get a banking system. You avoid nationalisation. You embrace pure competition. And no money gets thrown into a black hole.

Economist:

Yes. Pure internet banking wasn't an option in 1992. It could constitute a banking system. Such new banks would be able and eager to lend. The old banks could continue to deal with cash. But if they do crash..?

ME:

If a physical branch network is important. Co-opt the post office network. Or the credit union network. If internet access is important. Support internet cafes. Such an approach would be a snug fit with the government's policy of support rural Ireland and the roll out of the national broadband scheme...

Economist:

Sounds like it could work. But you know the old joke "If you want 4 opinions. Ask 2 economists"

So that's it. My dumb question to you is "Why not?" I'm hoping you can help me understand our options a little bit better.