Rolf Englund IntCom internetional
"with all the long-term adverse implications for moral hazard"
The proposed bail-out of Fannie Mae and Freddie Mac entails the socialisation of risk
The writer, 2001 recipient of the Nobel Prize for economics, is university professor at Columbia University.
Much has been made in recent years of private/public partnerships. The US government is about to embark on another example of such a partnership, in which the private sector takes the profits and the public sector bears the risk.
Defenders of the bail-out argue that these institutions are too big to be allowed to fail.
No insurance company would provide fire insurance without demanding adequate sprinklers; none would leave it to “self-regulation”.
Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.
All of these principles were violated in the Bear Stearns bail-out. Shareholders walked away with more than $1bn, while taxpayers still do not know the size of the risks they bear.
Something has to be done; on that everyone is agreed.
A basic law of economics holds that there is no such thing as a free lunch.