9/09/2007

09-09-07 - 3

What if you could borrow a bunch of money, invest it in various more or less risky ways, and then only pay back the loan if you make a profit? If your investments fail you just wipe the slate and start again. This is a fantasy pathway to huge easy money, but this is also exactly what banks and other financial institutions in the US do. They take in money from investors/depositors, they are allowed to invest it with very little oversight (the quality of their management is evaluated, but the rating is kept secret), if they fail they are bailed out either by the FDIC or the government. (in some cases they are bailed out by their peers, but this is usually accompanied by fed rate cuts or other measures to prevent it from really costing anyone money).

Of course this gigantic subsidy is not designed to help or protect consumers, it's designed to pump huge amounts of money into the financial institutions that created the system and write the checks for lawmakers. In an actual semi-fair pro-consumer system there would be two big changes :

1. The FDIC should be funded by the banks themselves, not backed by the government, and there should never be a government bailout - the banks should make up a consortium which is required to bail each other out.

2. The SEC/FDIC ratings of the liquidity and risk and management quality of banks should be made public so consumers can actually choose quality investment vehicles without this false illusion that they are all the same or that they are all safe.

Insurance companies are in a similar spot, where they are allowed to insure more than they can actually cover, and if something bad happens they get a bailout. They should also be required to reinsure each other.

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