Wednesday, October 28, 2009

Another Dumb Idea Courtesy of Barney Frank

Barney has decided that financial service firms should contribute to a fund that would then be available to "bail out" firms that go belly up. Great!

Imagine that, in your neighborhood, everyone was required to contribute to a fund in case any of your neighbors couldn't pay their bills. This shifts the responsibility away from the decision makers. Folks could easily run up big bills without difficulty. Why not? If I know there is a fund available in case Joe Smith can't pay, then I will lend Joe Smith unlimited amounts of money (so long as the fund is unlimited). And Joe? He will gladly borrow to the hilt, since the rates he pays reflect the fund that stands behind him, not his own profligacy.

So, what happens. Barney's bill will encourage financial service companies to take much greater risks than they have in the past and the market will provide these companies with the wherewithal to take these risks, since there is a fund hiding behind the scenes to absorb the losses. Of course, in reality, since so much risk will be taken, the taxpayer will ultimately bear the brunt of the losses in Barney's "too big to fail" world.

Better would be simply to let those who take the risk bear the brunt of the losses. Let the profligate go "poof" and leave the poor taxpayer alone. And, stop providing incentives for lenders to lend to those taking the most risk, which is exactly what Barney's fund would do.

Barney and Chris are in a race to see who has the dumbest ideas. I would say that Barney now has a slender lead. But, Chris is still in the running.