What's True of the Whole Need Not Be True of All of its Parts

Sun, 28 Sep 2008 15:02:16 +0000

On my mind this morning is how to intelligently explain the following thought. I caution that I don't think I'm there yet. Let's try it anyway.

I understand that the financial system must survive, but I don't think that's true of every financial institution currently within it. In fact, it seems like with a little effort, the government could figure out which financial institutions have committed such egregious violations of common sense and best practices in borrowing and lending that they should be excluded from any bailout plan and allowed to fail.

Even if it is just a subset of such institutions, the government gets to send a message that this conduct is not rewarded in its worst forms. And it does so in a fundamental way, not with window dressing on managerial compensation for banks that will ultimately make it. The government can use the resources that would have flowed to these institutions under a bailout to provide help to other institutions that might be compromised by their failure.

I liken this to condemning the crack house and making grants to the neighbors to fix up the neighborhood.

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While I'm working on this, here's some good Sunday morning reading:

  1. Reports on the bailout deal in The New York Times and Speaker Pelosi's office (via CalculatedRisk)
  2. A Memo Found in the Street, by Barry Ritholz
  3. The Opposite of Moral Hazard, posted by Mark Thoma
  4. Time Not for a Bailout, but a Nationalization, by Brad DeLong

Enjoy!