Wednesday, September 23, 2009

Bankruptcy or Bailout?

I will be testifying today before the House Financial Services Committe on a proposal to give the FDIC the same authority over bank holding companies (e.g., Citigroup) that it already has over banks. The key aspect of the proposal is that it allows the FDIC to "assist" failing institutions with taxpayer funds (e.g., by making loans, buying assets, taking equity positions). Thus, this propoal institutionalizes TARP.


In my judgement this is a terrible idea: it means moral hazard on a grand scale. You can read my full testimony here.


Paul Volcker, Arthur Levitt, Jr., Mark Zandi, and John Cochrane will also testify.

10 comments:

Chee Heong Quah said...

Yes. Emphatic and equivocally free banking, is the solution to moral hazard and excessive risk taking.

In a free banking environment, no bank is shielded and inept management will be removed by the market forces. No room for hanky-panky and cronyism.

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