Bailout 15: More on the solution | Summary and Q&A

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October 2, 2008
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Khan Academy
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Bailout 15: More on the solution

TL;DR

The Plutsky Plan suggests creating multiple banks with clean balance sheets and leveraged capital to stimulate credit markets and economic growth.

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Questions & Answers

Q: How will the Plutsky Plan prevent the "too big to fail" issue?

The Plutsky Plan suggests creating multiple banks instead of relying on a single institution, promoting competition and avoiding excessive concentration of power. This reduces the risk of a bank becoming too big to fail.

Q: Will the clean balance sheets of these banks attract deposits?

Yes, the public will likely deposit their money in these banks due to their clean balance sheets and government backstop. This will instill confidence and attract depositors seeking safer options.

Q: How can these banks leverage their initial capital?

With pristine balance sheets, these banks can leverage their capital at a 10:1 ratio, which is a typical leverage ratio in the banking industry. This allows them to introduce a substantial amount of liquidity into the market.

Q: What effect will the Plutsky Plan have on credit markets?

The Plutsky Plan aims to ensure credit markets continue to flow by providing these banks with access to funds from various sources, such as foreign governments and the private sector. This will enable them to introduce significant amounts of new loans into the economy.

Summary & Key Takeaways

  • The Plutsky Plan proposes creating multiple banks with significant initial capital to promote competition and prevent the "too big to fail" problem.

  • The banks can attract deposits from the public due to their clean balance sheets and government backstop.

  • Leveraging at a 10:1 ratio, these banks can introduce trillions of dollars into the economy, potentially aiding in economic recovery.

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