Giving financial institutions the wrong incentives

For those who thought that the bailouts were wrong the first time around, Barney Frank's legislation before congress will soon guarantee bailouts as a matter of law. The law "authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule." Quite bizarrely though:

the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.



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