CONTEX: Naughty bank. Don't do it again. I can see you've really got a grasp of the complexities of the current economic situation.

Well, I just think we need to shut down these bad banks

No, no, you don’t understand. We need to set up a bad bank if we’re going to have a chance of economic recovery.

You’re right, I don’t understand. Why on Earth would anyone deliberately create a bad bank?

Economists have come up with a radical idea to solve the current banking crisis. They believe the recent bailout of the banking system by governments is not working because they don’t tackle the fundamental problem: toxic assets. Instead of letting these toxic assets fall to their reduced market value, governments are trying to prop them up with huge amounts of cash.

Let me guess – the dig-outs are just digging us in deeper.

Correct. Keeping these toxic assets afloat will only prolong the misery and delay any chance of an upturn. Better to let these toxic assets fall to their street value and let them drain off so we can all get on with the recovery programme.

But if we let it all collapse, then the whole system might come down too.

Not if we create a bad bank. This will be a special institution, run by the Government, into which all toxic assets are thrown. The assets are then allowed to sink to their natural level, with shareholders and investors taking the hit, thus sparing the taxpayer the burden of propping up a big dead dinosaur. It’s a way of quarantining these bad assets so they can’t infect the rest of the financial system.

So, how toxic are these assets? Should we wear protective gloves?

It’s estimated that Germany has €300 billion worth of toxic assets, the UK banks €200 million and the US at least €800 billion.

And would a “bad bank” be a good idea for Ireland?

JP Morgan seems to think so. It suggests a “good band/bad bank” structure to get rid of risky loans and clear the way for more solid lending capacity. Under the scheme, the Government would buy the dud loans from the main banks in return for Government bonds, and put them into a “bad bank”. With these toxic assets locked away, the banks could get back to normality – with a little extra help from the shareholders, of course, who would need to put in more capital to get things back on track. Order would be restored, and good banking practices reinstated. Bank of Scotland Ireland chief executive Mark Duffy reckons an Irish bad bank scheme is “coming to a cinema near us very soon”.

But how do we know if this would work?

It has worked before – in Sweden in the early 1990s. The Scandinavian country experienced a big property boom in the 1980s, but it turned out to be more of a bubble. Banks were left with loans that weren’t worth the deeds they were printed on, so the Swedish government set up two “bad banks” (brand-named Securum and Retriva), into which they put all the dodgy loans, holding them there and releasing them back into the market when the time was right. It saved the Swedish economy, and a similar move by Brian Cowen, say observers, would save our bacon too.

Try at home: "Okay, we're locking all your sweets, DVDs and electronic games into this 'bad cupboard'. When you've done your homework and cleaned the house, we might free these toxic assets."

Try at work:"Toxic? Listen, if this bank was a beer, we'd glow in the dark."