Bailout is Suboptimal But Safe Banking is Optimal for Taxpayers


Sub: The bailout proposal is sub-optimal for taxpayers

It is very remarkable that the market forces are imposing a “safe banking” policy that I had proposed in 2003: we now have $3 trillion money market funds (“safe banks”) insured by the federal government and other banks operating as “universal banks.”[1]  To consummate this policy, we just need to deregulate the “universal banks” and not federally insure their deposits or monitor them.  This will make banking safe and sound, with (a) the safe-banks catering to panic-prone depositors, (b) the universal banks serving the rest, and (c) the taxpayers losing little due to moral hazard. 

Safe banking will obviate the continual gargantuan burdens on taxpayers due to moral hazard in banking.[2]  I had predicted in my book and paper in 2003 that the loss to taxpayers would be at least a trillion dollars.  That this prediction has come true is less important than the reasons for failure of the industry vividly outlined in my book that the Congress has now conceded as per press reports.

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