The Bailout Follies

Wed, 22 Oct 2008 15:20:05 +0000

I would be laughing my head off at this report in The Washington Post this morning if it weren't so sad. According to the lede, "Several major U.S. banks are leaning toward spending a portion of their federal rescue money on acquiring other financial firms rather than for issuing new loans."


You should not be surprised at this behavior. <!--break-->Not one little bit. In fact, one can only conclude that this was the desired behavior all along. Being subsidized by the Treasury to overpay for troubled targets achieves the same ends as the Treasury overpaying directly for the assets that put them in trouble. Job well done. Go have a lavish retreat on the taxpayers' dime.

There is every compelling reason for the government -- via the Fed -- to provide liquidity and to avoid runs on solvent banks. The Fed has been doing an admirable job this year. There is no reason at all for the government to prop up zombie banks. The FDIC should move in and close them down. Equity holders get wiped out. Debt holders take a haircut. The taxpayer makes good on the depositors' claims. But nothing more.