The government shouldn't bail out failing financial institutions, for they deserve to face the consequences of their past actions. Instead, use the same money to shore up the financial institutions which are doing well -- hi, my name is Uncle Sam, and I'd like to open an account at your bank and make an initial deposit of $1 billion. These banks who are doing well (or doing better compared to the rest) are in such a state because of responsible lending and shrewd investment in the past which is the best indication available that they will continue such behavior on these new deposits. Even in the troubled economy, they are the ones most likely to figure out who to lend to and what to invest in, thawing the credit freeze in the market-optimal way.
The government may use its regulatory powers to discover which financial institutions are doing well.
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