Tuesday, January 12, 2010

Bailout premiums

Mark Kleiman makes lots of sense:
We now know that sufficiently large financial institutions enjoy implicit insurance from the taxpayers, because they’re “too big to fail”: i.e., so big that letting them fail risks cascading failure, as letting Lehman fail turned out to do.

The value of that insurance depends on the size of the institution and the risks it takes.

So charging all large financial institutions, whether called “banks” or not, an “insurance premium” based on size and risk on a seems both equitable and efficient.
Whinging about how this will supposedly make banks less able to lend is just that, whinging. Banks lend because it's how they make money. Paying their property insurance premiums is a cost of doing business; so should be paying "bailout premiums."

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