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Minneapolis Fed's Kocherlakota: Here Come "Rescue" Bonds, And Taxes, Taxes, Taxes

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Just in case you were wondering what America's rolling sociaization/nationalization will look like, here is Minn Fed's Narayana Kocherlakota telling it how it is.

Taxing Risk
Narayana R. Kocherlakota - President
Federal Reserve Bank of Minneapolis

Economic Club of Minnesota
Minneapolis, Minnesota

May 10, 2010

In the mid-2000s, we—as investors, home buyers, and bank
lenders—collectively bet that house prices would not fall by 30 percent
in most major metropolitan areas in three years. We were wrong. This
mismatch between our expectations and our realizations was the ultimate
source of the financial crisis of 2007-09.

The Congress of the United States is currently considering
legislation to restructure financial regulation. However, no matter how
well-written or how well-intentioned the legislation may be, no law can
completely eliminate the kinds of collective investor and regulator
mistakes that lead to financial crises. These mistakes have taken place
periodically for centuries. They will certainly do so again. And once
these crises happen, there are strong economic forces that lead
policymakers—for the best of reasons—to bail out financial firms. In
other words, no legislation can completely eliminate bailouts. Any new
financial regulatory structure must keep this reality in mind.

My theme today is that, although bailouts are inevitable, their
magnitude can be limited by taxes on financial institutions. I arrive
at this conclusion about the usefulness of taxes by thinking through an
analogy that I’ll develop at some length. I will argue that, knowing
bailouts are inevitable, financial institutions fail to internalize all
the risks that their investment decisions impose on society. Economists
would say that bailouts thereby create a risk “externality.” There is
nearly a century of economic thought about how to deal with
externalities of various sorts—and the usual answer is through
taxation. I will suggest that the logic that argues for taxation to
deal with other externalities is exactly applicable in this case as
well. As always, any views I share today are my own, and not
necessarily those of others in the Federal Reserve System.

My case for taxing banks is distinct from one often heard in popular
discourse. This latter logic usually runs: Taxpayers put X dollars into
the banking sector, and the banking sector should repay all of that
money. This argument is, I think, fundamentally grounded in a desire
for revenge: Some big banks—perhaps now gone forever—took our money,
and so all big banks must pay. Taxes are seen as punishment—a means of
exacting retribution from the guilty (them) to compensate the innocent
(us).

My story is different. At least some big banks did make socially
undesirable choices. But — in large part—they were led to make those
choices by incentives within the tax and regulatory system. Parts of
these incentives were shaped by the ultimately correct expectation that
some bailouts would take place in the event of a financial crisis.
These government guarantees—no matter how implicit they might have
been—created an incentive for financial institutions to make socially
undesirable choices. Taxation is a useful way to correct this incentive.

Earlier, I claimed that bailouts of financial institutions are
certain to occur in financial crises. Why do I say this? There are many
forces at play, but I believe that the strongest has to do with the
very nature of financial intermediation. Investors in financial
institutions always want the ability to pull out their funds quickly.
For this reason, financial institutions’ liabilities often take the
form of short-term debt and deposits. But such short-term financing
instruments are intrinsically prone to self-fulfilling crises of
confidence that economists term “runs.”

Imagine that Bank X needs $100 billion of one-day loans to survive.
This means that for a given lender to be willing to make a $1-billion,
one-day loan to Bank X, that lender has to believe that Bank X will get
another $99 billion in one-day loans. Then, Bank X may fail simply
because every possible lender believes correctly that no lender is
willing to lend to Bank X. Such a crisis of confidence can occur
regardless of the true condition of Bank X.

This story is hardly a new one. It’s exactly why we have deposit
insurance: to prevent runs by reassuring bank depositors that their
money is safe. But the story has huge consequences for how governments
operate. In a financial crisis, there is a tremendous sense of
uncertainty. There are some truly insolvent financial firms out
there—but no one knows for sure which ones they are. And during a
crisis, the panic in the air means that any institution—even one with
solid fundamentals—may be subjected to a run if its investors lose
confidence in its solvency.

In such an atmosphere, contagion effects become extremely powerful.
Even a slight loss by one short-term creditor can lead all short-term
lenders to rush to the safety of Treasury bills. Such flight would
endanger the survival of key financial institutions, even if they are
fundamentally sound. Governments cannot risk such systemic collapse,
and so during times of crisis, they end up providing debt guarantees
for all financial institutions. Thus, policymakers inevitably resort to
bailouts even when they have explicitly resolved, in the strongest
possible terms, to let firms fail.

Many observers of the events of September 2008 have emphasized the
need for better resolution mechanisms. Different people mean different
things by this, but most want to impose losses on debt holders. I’m not
opposed to faster resolutions of bankruptcies. But I do not believe
that better resolution mechanisms will end bailouts. Indeed, I’m led to
make a prediction. No matter what mechanisms we legislate now to impose
losses on creditors, Congress, or some agency acting on Congress’
behalf, will block them when we next face a financial crisis. And
Congress will do so for a very good reason: to forestall a run on the
key players in the financial system.

So, that’s my first point: Bailouts are inevitable. Let me move to
my next point: Bailouts create inefficiencies in the allocation of real
investment. Here’s what I mean. Financial institutions make investments
that are, by their very nature, risky—that is, their returns are not
certain. They finance these investments, at least in part, using debt
and deposits.

Now, imagine for a moment that we live in a world without bailouts,
so that the government does not provide debt guarantees or deposit
insurance. If a financial institution decided to increase the risk
level of its investment portfolio, its debt holders and depositors
would face a greater risk of loss. By way of compensation for that
greater risk, they’d demand a higher yield. As a result, in the absence
of government guarantees, financial institutions would find it more
costly to obtain debt financing for highly risky investments than for
less risky ones. This effect, on the margin, would curb a firm’s
appetite for risk. It would have an especially powerful effect on
highly leveraged financial institutions, because high debt-to-asset
levels mean higher risk of being unable to fulfill debt obligations.

But now return to the real world, with deposit insurance and debt
guarantees, and the inevitability of government bailouts. Even if they
only kick in during financial crises, these guarantees change this
natural market relationship between risk and cost. The depositors and
debt holders are now partially insulated from increases in investment
risk, and so do not demand a sufficiently high yield from riskier
firms. Financial institutions take on too much risk, because they are
no longer deterred from doing so by the high costs of debt finance. And
this missing deterrence is especially relevant for firms that are
highly leveraged, because they should be paying out especially high
yields on their debts.

In this way, the expectation of bailouts leads to too much capital
being allocated toward overly risky ventures. These misallocations of
capital don’t create the collective mistakes in predictions that
generate financial crises. But the misallocations do mean that society
loses a lot from those mistakes—a lot more than is efficient.

What kind of policy would be useful in correcting this inefficiency?
In what follows, I will offer an analogy from a completely different
arena of public policy that can help us think through this key
question.

Consider a factory that creates air pollution as a byproduct of
operation. When the firm that owns the factory chooses to produce more
output, it incurs various private costs: more raw materials,
more labor, and so on. But the production increase also generates more
pollution that will be absorbed by the surrounding community. The
pollution is a social cost of production not paid for, or
“internalized,” by the firm that generates it. Economists refer to such
costs as “externalities.”

This same distinction between private and social costs applies to
financial institutions that are facing debt guarantees. Such guarantees
imply that some portion of the risk produced by a firm’s investment
decisions is absorbed by taxpayers. In making decisions about what to
invest in, the firm ignores that portion of risk. It is a social cost
of the project that the private firm does not internalize. Just like
the pollution, the risk borne by taxpayers is an externality—what I
will call a “risk externality.”

This analogy is useful because economists know a lot about how to
deal with externalities. We can exploit their years of research to
address the problem of financial regulation when government bailouts
are inevitable. In particular, that long history of thought says that
the best way to correct externalities is by providing the right kinds
of incentives through appropriate taxes.

Let me be more specific. Again, let’s think about the firm with a
polluting factory. Many of its choices affect the amount of pollution
produced, including the amount of time that the firm runs the factory
during the workweek, the sorts of antipollution technology employed,
and the kind of energy used to run the factory. Now, the government
could regulate the firm’s pollution levels by controlling each and
every one of these choices. However, to do so, the government has to
choose how to trade off these three (and other) factors against one
another.

Its trade-off decisions will be influenced by both pollution
considerations and cost factors. If antipollution technology is cheap,
the government may simply require the firm to invest in that. But if
antipollution technology is expensive, the government may require the
firm to switch to using natural gas instead of coal. Making these
trade-offs requires a tremendous amount of firm-specific information
and firm-specific cost minimization. To put it mildly, historical
evidence suggests that governments are not very good at such
micromanagement of factory-level operation; that’s why we have private
markets.

The solution to this difficulty is to regulate the amount of pollution produced by the firm, rather than how
the firm produces that pollution. The central problem here is that
pollution has a social cost that the firm does not internalize when
choosing its level of production. From society’s point of view, the
firm will overproduce pollution. However, the firm will choose the socially efficient level of pollution if it is required to pay for—or internalize—the social cost of the pollution.

More concretely, suppose that the firm is told, before choosing its
level of production, that the government will measure the amount of
pollution that the firm generates and charge the firm a tax that is
exactly equal to the social cost of that quantity of pollution. This
policy generates a tax schedule that translates the amount of
pollution generated into an amount paid by the firm. If the firm knows
that it faces this tax schedule, its costs of production will include
the social cost of pollution, along with labor, materials, energy, and
the like. In this way, what was external to the firm becomes internal.
As a result, the firm will choose the socially efficient level of
production. Just as importantly, it will automatically choose to
produce that pollution—and its other more beneficial outputs—in a
cost-minimizing fashion. The government does not need to solve the
firm’s cost-minimization problem.

These lessons about pollution regulation translate directly into
lessons about financial regulation. As in the pollution case, a
financial institution should be taxed for the amount of risk it
produces that is borne by taxpayers. The firm will then choose the
socially optimal level of risk.

Here’s my preferred policy. The firm is told that the government
will estimate the expected, discounted value of bailouts that the
financial institution (or any of its stakeholders) will receive in the
future. I say “expected” because the amount of the bailout is uncertain
(and indeed is likely to be zero much of the time). I say “discounted”
because the bailout may be received next year or in 30 years, and we
need to discount accordingly. Clearly, this estimate will depend on
many firm choices and attributes, including its leverage ratio, the
maturity structure of its liabilities, the risk characteristics of its
investment portfolio, and its incentive compensation schemes. For
example, the expected bailout will be higher for firms with highly
risky investments than for firms with less risky portfolios.

Having done this calculation, the government then charges the firm a
tax that is exactly equal to the expected discounted value of the
firm’s bailouts. Just as in the pollution example, this
measurement-plus-taxation policy confronts the firm with a tax schedule
that translates its choices into a cost paid by the firm. The tax
amount exactly equals the extra cost borne by the taxpayers because of
bailouts, appropriately adjusted for risk and the time value of money.
Knowing that it faces this tax schedule, the firm no longer has an
incentive to undertake inefficiently risky investments. Its investment
choices will be socially efficient. It is useful to tax a financial
institution producing a risk externality, just as it is useful to tax a
firm producing a pollution externality. The purpose of the tax in both
instances is to ensure that the firm pays the full costs—private and
social—of its production decisions.

I emphasized that the pollution tax corrects the pollution
externality without creating any new inefficiencies for the firm. The
risk tax has the same property. Policymakers are considering a host of
regulatory responses to the events of the past two and a half years,
including higher capital requirements, leverage caps, and restrictions
on incentive compensation. All of these potential changes are good in
that they serve to lower the amount of risk-taking by financial
institutions. However, they may also create new kinds of inefficiency
for the targeted firms. For example, imposing new restrictions on
incentive compensation may hamper a firm’s ability to motivate its
employees. In contrast, my proposed risk tax, like the pollution tax,
corrects the risk externality without creating any new inefficiencies.

The proposed tax does require bank supervisors to calculate the
expected present value of future bailout payments. These calculations
are likely to be complex in a number of ways. Moreover, the
calculations could well be controversial. Financial institutions that
follow highly risky strategies get especially high profits when those
strategies are working. Thus, supervisors would be required to levy
high risk taxes on exactly those institutions that appear extremely
successful. For these reasons, it would be useful to develop an
objective way to compute the required tax using market information.

Here’s what I have in mind. Suppose that, for every relevant
financial institution, the government issues a “rescue bond.” The
rescue bond pays a variable coupon equal to 1/1000 of the transfers
made from the taxpayer to the institution or its stakeholders. (I pick
1/1000 out of the air; any fixed fraction will do.) Much of the time,
this coupon will be zero, because bailouts aren’t necessary and so the
firm will not receive transfers. However, just like the institution’s
stakeholders, the owners of the rescue bond will occasionally receive a
large payment. In a well-functioning market, the price of this bond is
exactly equal to the 1/1000 of the expected discounted value of the
transfers to the firm and its stakeholders. Thus, the government should
charge the financial firm a tax equal to 1000 times the price of the
bond.

Notice that this approach could be used for a wide variety of
financial institutions, including nonbanks. In principle, the
government need not figure out in advance exactly which are
systemically important and which are not. Instead, it could simply
issue a rescue bond for every institution. Then, the market itself
could reveal how systemically important each institution is through the
price of its rescue bonds. Of course, markets are not always perfect,
and it would be inappropriate to rely only on market measures to
compute the appropriate taxes. However, the prices of rescue bonds
would contain valuable information that should be an important input
into the supervisory process.

As I mentioned at the beginning, Congress is in the process of
considering changes to the financial regulatory system. In December,
the House passed the Wall Street Reform and Consumer Protection Act.
The Senate is currently deliberating the Restoring American Financial
Stability Act. There is much to like in both pieces of legislation.
However, neither piece of legislation incorporates the kind of risk tax
that I have described to you. The Senate bill proposes no new taxes on
financial institutions, unless some fail. In that event, taxes could be
levied on surviving large financial institutions, regardless of whether
or not they had actually engaged in excessive risk-taking. The House
bill has a new risk-based assessment on large banks and hedge funds.
Such a risk-adjusted tax should have desirable incentive effects on the
targeted firms. However, the tax will end once it has raised $150
billion. This cap is problematic, because once the tax is ended, so too
will its desirable incentive effects.

Why do the bills fail to include new levies of the kind that I
propose? In my view, both bills significantly understate the extreme
economic forces that lead to bailouts during financial crises. Indeed,
the opening language of the Senate bill actually declares that it will
end taxpayer bailouts. This objective is laudable. But it is not
achievable—and thinking that it is can lead to poor choices about the
structure of financial regulation.

To wrap up: Bailouts will inevitably happen during financial crises
to prevent runs and systemic collapse. We need to structure financial
regulation so as to limit the size and occurrence of these bailouts.
How should we best design such regulations? The social distortion we
face is that debt guarantees create a risk externality, because
financial institutions do not bear the full costs of their investment
choices. Financial regulation should be designed so as to best control
that externality. As is true with any externality, the risk externality
can be eliminated with a well-designed tax system. Figuring out the
right tax may be complicated, but the task can be eased using
appropriate information from financial markets.

 


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Mon, 05/10/2010 - 14:07 | Link to Comment shargash
shargash's picture

Is this a parody?

Mon, 05/10/2010 - 15:44 | Link to Comment tony bonn
tony bonn's picture

unfortunately the asshole was serious....i stopped reading after i got to the part about taxpayers wanting revenge.....this is very subtle and sophisticated contempt and derision....i am sure the original draft used minions, little people, serfs, or slaves rather than taxpayer....

this asshole reminds me of the aristocracy depicted on the excellent pbs documentary about marie antoinette shown last night....the king was hunting at versailles and the queen traipsing through her fantasy garden when the mob arrived to take them into custody...you can only imagine what kind of low rent intellects these out of touch royal buffoons were.....

i can only hope americans do the same thing to their atristocracy including a public beheading....

Mon, 05/10/2010 - 14:08 | Link to Comment doublethink
doublethink's picture

 

Hi-yo Silver!

 

Mon, 05/10/2010 - 14:10 | Link to Comment Hansel
Hansel's picture

Disintermediation... Bitches!!!

Mon, 05/10/2010 - 14:13 | Link to Comment PunkSgt
PunkSgt's picture

Wow you can work for the government and do LSD!!!! 

Mon, 05/10/2010 - 22:28 | Link to Comment hardball22
hardball22's picture

What about DSLs?

Mon, 05/10/2010 - 14:17 | Link to Comment Psquared
Psquared's picture

This is of no help if 1) the FRB can manipulate interest rates; and 2) banks can bet their statutory capital on these guesses, and 3) banks can become "TBTF." The only thing that would help minimize this is to completely and absolutely separate Investment Banks and Commercial Banks and limit their size. It won't stop bubbles and collapses, but it might limit the reach and extent of the failures and the need for public funds for rescue.

When the railroads collapsed in the 1870s investment houses that speculated (and purchased congressional failures) also collapsed. The real trick is to limit the dealing between Investment Banks and Depository Banks. If they stay intwined, even if divested of each other, a strictly investment bank can still crash the system.

Mon, 05/10/2010 - 20:32 | Link to Comment Orly
Orly's picture

You are correct, P.  The only way this would work is within a social network of smaller, less polluting entities.  There can be no atomic bomb called JPMorganChase that is about to implode from running false books in metals.

The self-correcting mechanisms the author presents make sense, therefore, only in the event of a do-over.  But what now?  Speaking of pollution, Goldman is fixin'a' clean up on carbon trading.  What tax can we possibly put on them when they are really the ones taxing us with the explicit consent of the United States government?

Small banks and holding companies- neighborhood banks- should be the norm going forward and their growth will be inhibited only by the amount of risk they would assume.  The math would suggest that both conservative and risky ventures would grow at just about the same pace.  That's a good idea.

What do we do now, though with Chase, Citi, Wells, etc., that together contain enough social pollution to wipe the American way off the map?

Mon, 05/10/2010 - 14:26 | Link to Comment Fraud-Esq
Fraud-Esq's picture

DISGORGE PROFITS AND BONUSES OF PEOPLE, not institutions. Entities, institutions, corporations and even nations are just piffle circumstantial status facts getting in the way of justice. 

Must disgorge. That's the only way to do it. Forget the tax. Go after the loot. Give me a statute that reads:

"The Bank Profiteer Disgorgement Act of 2010"

and I'll show you the $$, reduce your taxes, and make sure this doesn't happen again.  

Mon, 05/10/2010 - 14:33 | Link to Comment ranrun
ranrun's picture

i was there. he basically described what interest rates are suppose to do to "regulate" risk.  but his message was "bailouts are inevitable" and we are here to rape you.

Mon, 05/10/2010 - 14:55 | Link to Comment Screwball
Screwball's picture

Mr. Narayana Kocherlakota - go fuck yourself.

Mon, 05/10/2010 - 16:49 | Link to Comment ColonelCooper
ColonelCooper's picture

With an AIDS infested prick.

Mon, 05/10/2010 - 15:07 | Link to Comment SDRII
SDRII's picture

Sounds like a inverse floating jump z bond better known as a donut bond in wall street parlance

Mon, 05/10/2010 - 15:21 | Link to Comment economicmorphine
economicmorphine's picture

This sort of thinking is why I couldn't get out of Minnesota quickly enough:

 

1.  n the mid-2000s, we—as investors, home buyers, and bank lenders—collectively bet that house prices would not fall by 30 percent in most major metropolitan areas in three years.

Uhh, not all of us thought that.

2. However, no matter how well-written or how well-intentioned the legislation may be, no law can completely eliminate the kinds of collective investor and regulator mistakes that lead to financial crises.

We don't have to completely eliminate them to avoid crisis.  All we need to do is have functional regulation that keeps the parties honest.

3.  My theme today is that, although bailouts are inevitable, 

Uhh, no, they're not inevitable.

I could go on but what's the point?  

Mon, 05/10/2010 - 15:35 | Link to Comment Mitchman
Mitchman's picture

The logical fallacies that this man espouses are too many to list.  The most important one being the lack of analysis of the oligopolistic structure of the bank market and irts effect on risk taking.  There is no good "substitution effect" for the services that the oligopolists provide.


The other glaring fallacy is that somehow, the externality, once internalized, will be shared evenly throughout the firm.  As we have come to expect, the cost of the externality will flow as far as possible down the food chain and all of senior management and traders will make sure that they continue to be compensated as they were before the "externality" tax was imposed.


Oh, for the days when we respected the members of the Federal Reserve Board!

Mon, 05/10/2010 - 16:34 | Link to Comment augmister
augmister's picture

Hope he has a cabin hideout in the MN woods when the SHTF....Geez, could ANYBODY make up that presentation?   Made my eyes bleed.

Mon, 05/10/2010 - 17:03 | Link to Comment ColonelCooper
ColonelCooper's picture

I'm from the woods in MN, and don't think he'd get a very warm welcome here.  Bitch of it is though, I'm the Asshat for building a house I could afford, not robbing every cent of equity out of it to buy shit I don't need, and paying bi-weekly to get ahead.  Where's my inevitable bailout?  Guess I'm the chump.

Mon, 05/10/2010 - 21:47 | Link to Comment Hulk
Hulk's picture

Same here. Chump with a capitol C

Mon, 05/10/2010 - 16:48 | Link to Comment Tinsu
Tinsu's picture

I stopped reading when he talked about that drunken night when it was just him, a few bonds, and a fainting goat.

Mon, 05/10/2010 - 17:34 | Link to Comment Montecarlo
Montecarlo's picture

Oh - was that very far, because I didn't make it past the second paragraph.  That's funny!

Mon, 05/10/2010 - 17:49 | Link to Comment RichardENixon
RichardENixon's picture

Geez, I wish I had stayed awake until I got to that part.

Mon, 05/10/2010 - 17:47 | Link to Comment Captain Willard
Captain Willard's picture

I have an even better idea than the esteemed Pres. of the Minneapolis Fed. By the way, his idea is not so bad, since it prices failure risk in the marketplace. It's a little like a CDS. In his scenario, the market at least gets to "vote" on a bank's credit-worthiness, and the shareholders have to pay based on this market verdict, before the government goes ahead and bails them out anyway.

But back to my better idea: It's called capital. Let them raise capital. Banks used to have it in the old days, before government subsidies and guarantees and all this intellectual wanking from Fed officials. Limit deposit insurance to $10,000 for individuals and $0 for corporations and you'll get results.

Mon, 05/10/2010 - 17:51 | Link to Comment RichardENixon
RichardENixon's picture

That kind of subversive thinking might get you a visit from the guys in black suits and sunglasses, Captain.

Mon, 05/10/2010 - 20:16 | Link to Comment BearOfNH
BearOfNH's picture

A simpler market-based approach is to have assessable stock. Meaning, if the firm goes bankrupt the shareholders would have to come up with the balance due, instead of the taxpayers. The stock price could actually go negative.

The effect of this is that the board and shareholders become very interested in the bank's solvency. Investing in banks would require a substantial amount of research thereby requiring a substantial amount of disclosure by any bank wishing to raise capital. Sunlight is the best disinfectant.

It may sound a bit wacky but there is sense here. The owners of the bank become responsible for the actions of management, instead of the current "Heads I win, tails you lose" mentality.

Mon, 05/10/2010 - 20:38 | Link to Comment Orly
Orly's picture

Then every owner of stock would have to realise that, in essence, no matter what he bought and when, he would be buying stock on margin.

Not gonna happen.

Besides, that's what bankruptcy is for: sell all your stuff and vanish.  No one should be more liable than they were willing to be.

Mon, 05/10/2010 - 22:31 | Link to Comment Goyim Sheep
Goyim Sheep's picture

That would just simply make them cook the books even more until they all cleared out their stock options.

Tue, 05/11/2010 - 08:22 | Link to Comment Captain Willard
Captain Willard's picture

Right, good point. Jim Grant has proposed your solution recently. I agree with you also, which is what I meant by let them "raise capital".

I think the Minn Fed Pres wants the banks to buy insurance whose rates would be set by the market's opinion of their likelihood of default. This is not as good of an idea as yours and Grants, but it's better than what we have now. Real-time market assessment of bank risk wouldnt be a bad thing either.

But I agree with many of the other ZH posters that his cynicism regarding the inevitability of Fed/Taxpayer bailouts is a shocking position for a regional Fed President to take publicly. It doesn't exactly send the proper message to bankers.  

Mon, 05/10/2010 - 19:40 | Link to Comment ambrosiac
ambrosiac's picture

 

I like this post.  The negative comments above I consider unfair, be they in fun or a knee-jerk reaction.

His idea is that bailouts will have been paid for by the proposed tax;  the very existence of said tax will be a disincentive towards all-out, reckless practices.   The TBTF issue might be addressed by scaling up part of the tax based on size, a more than linear penalty, thereby making excessive size unprofitable.

 

Whether Congress will ever pass such a law, breaking regulatory capture, is another matter.

 

 

Mon, 05/10/2010 - 20:00 | Link to Comment Anonymouse
Anonymouse's picture

Or an even better idea would be--

 

DON'T BAIL OUT THE *(^@$%!

Mon, 05/10/2010 - 20:39 | Link to Comment Trifecta Man
Trifecta Man's picture

Get ready for the latest financial doomsday protection derivative:  bailout futures!  Along with bailout options.  Coming to an exchange near you.

Mon, 05/10/2010 - 21:49 | Link to Comment Iam_Silverman
Iam_Silverman's picture

"However, no matter how well-written or how well-intentioned the legislation may be, no law can completely eliminate the kinds of collective investor and regulator mistakes that lead to financial crises."

Glass-Steagall?  Well, it would be a start, wouldn't it?

Let the investors, "invest (gamble)".  Let the bankers, bank.

Let the unprofitable, FAIL!

Oh, and leave my IRA and 401K alone - I don't want to buy your T-Bills.  I am quite happy in stable value.

Mon, 05/10/2010 - 23:17 | Link to Comment Kreditanstalt
Kreditanstalt's picture

What was "the financial crisis of 2007-2009"?

Tue, 05/11/2010 - 00:17 | Link to Comment glenlloyd
glenlloyd's picture

This type of mentality just smells socialistic.

I think his premise is faulty to begin with. Bailouts / backstops, guarantees etc are not inevitable. His view starts by suggesting that they are inevitable. They are inevitable to the degree that we have a crony capitalistic pig congress.

For every new regulatory rule there are probably a thousand people looking for a way to defeat it, either through SIV's etc that are not visible. If there's a rule there's a loophole and someone will find it.

I will admit that some of his ideas have merit, I just don't like who he works for and I don't like the fact that he believes bailouts will happen in perpetuity. When you start from that premise you totally lose the concept of capitalism and the need for winners and losers.

 

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