5/18/2008

05-18-08 - 8

A lot of newspaper articles about these financial bail-outs sort of miss the point. The current Fed & UK programs to exchange bad paper for good or to offer emergency credit and super low rates is of course in fact a direct subsidy worth quite a bit. But if you just look at the $ value of that subsidy you're missing the real subsidy, which is the gaurantee of help when you're in trouble, which allows you to take more risks all the time. It's a massive EV boost throughout the lifetime of the bank, not just in these rare bad times, but in the good times too.

Now having the government as a backup insurer is not necessarilly a bad thing. It would be very expensive for companies to properly insure themselves if they had to, or they would have to take much smaller risks. Imagine if when a corporation went bankrupt the board & CEO had to personally cover the debt - they would become much more cautious, which would hurt the economy as a whole. What is irksome is that the large corporations enjoy this special benefit that nobody else gets.

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old rants