Repairing financial markets and revitalizing lending will require governments to remove bad assets from banks and recapitalize them, Laura Tyson, an economic adviser to the Obama administration, said.
“The natural next step is, which is real simple, you take the bad assets out, the balance sheets are hit really hard, you recapitalize banks with different rules, and they go out again and lend,” Tyson said in a panel discussion at the annual meeting of the World Economic Forum.
The Obama administration is weighing the “bad bank” idea as part of its overhaul of the $700 billion financial rescue plan.
Tyson also said that testimony to the seriousness of the world economic crisis is that inflation is no longer the risk. “The issue that people are concerned about is deflation, not inflation but deflation. That's the depths of the crisis that we are now confronting,” she said.
She also strongly disputed views that government debt issuance to finance fiscal stimulus and bailout plans is crowding out the private sector, saying that “right now the securities markets are broken.” (Reuters)