Matt Yglesias reads the Wall Street Journal talking about "distressed assets" and offers a clear explanation of one of the under-discussed facets of the banking problem. Namely, that the banks are being crushed under the weight of loans backed with distressed assets, not assets. The problem is not what the banks have. It's what they owe:
I'm increasingly frustrated with the conventions in which this idea is discussed in public. I think an ordinary person reading that sentence would think that the problem with Citi is that some of its assets are somehow “distressed” or “toxic” in a way that's causing a problem for the rest of the bank. Take the toxicity off its hands, and the rest can go merrily about its way. But that's not right. We can argue 'till the cows come home as to what the assets in question are “really” worth, but at a minimum they're worth $0. And in practice they're sure to be worth more than $0. Assets with a positive value can't be a problem for a company. A company gets into trouble because of its debts. Citi’s problem isn’t that it has toxic assets, it’s that it made loans backed with toxic assets. You don’t rescue banks by “tak[ing] distressed assets off the balance sheet of Citigroup or other troubled financial institutions.” The problem isn’t the assets, it’s the debts. You can deal with the problem by giving the banks vast sums of money in exchange for their toxic assets but in this case what’s solved the problem isn’t that the assets came off the balance sheet, it’s that the money you gave them got on the balance sheet. Alternatively, you can create a government-owned bad bank that owns the bad assets and assumes responsibility for much of the debt. In either case, though, the key element of the rescue is expenditure of taxpayer funds to service the debts, not anything that’s being done with the assets.
