Start New Banks?

By Matthew Yglesias

Paul Romer has an interesting idea that could avoid many of the problems associated with bailing out existing banks, and the problems associated with nationalizing them—why not take a few hundred billion dollars and use them to start new banks?

The government has $350 billion in Troubled Asset Relief Program (TARP) funds that it can use to encourage new bank lending. If this money is directed to newly created good banks with pristine balance sheets, it could support $3.5 trillion in new lending with a modest 9-to-1 leverage. Right out of the gate, the newly created banks could do what the Fed has already been doing — buying pools of loans originated by existing banks that meet high underwriting standards.

Instead of seizing and/or buying existing banks, in other words, the government would use its funds to set up a few new ones and then steadily sell them off into private hands. This sounds promising to me.