Observe that the unregulated Credit Default Swap market is now working just fine, despite handling gigantic money flows, such as the failure of the Icelandic banks, that shake other markets, despite, or perhaps because of, the fact that more highly regulated markets have frozen up. What went wrong in a short while ago in unregulated markets was that people in an unregulated market would look at a highly regulated participant …
Month: October 2008
The cause of the subprime crisis
The subprime crisis was caused by regulation and the expectation that some companies were too big to fail – that if those companies got in trouble, the government would make sure their debtors were paid. What did regulation tell financiers about subprime loans? It told them they had better make subprime loans, or face a lawsuit by ACORN, a lawsuit in which the regulators made it clear they would be …
The cause of the crisis
The bailout will fail. If the government offers implicit or expicit debt guarantees, if a firm is “too big to fail, then that firm can easily borrow lots of money cheaply, and lend that money to people not so guaranteed at a higher interest rate. Free Money! The too big to fail firm is going to take absurd risks that no one would ever take with their own money. And …
The cause of the crisis
If a company is too big to fail, then people will take risks they would not otherwise take. “Too big to fail†is an implicit subsidy for taking big risks – which results in people taking big risks. So we have just paid people seven hundred billion dollars for taking stupidly big risks. What do you think is going to happen?
What the bailout does to capitalism and the dollar
As we have seen, organizations that are too big to fail, fail big. The US government is the biggest of them all. For credit to work, people who need credit should not get credit. You should only be able to get credit if you can prove you do not need it. The major purpose of the bailout is to ensure that people who need credit will continue to get it. …