Looks like debt reduction isn't in the government's vision for the future
Fretting over debt reduction? You must be one of the little people. For example, those with lots of credit card debt have spawned a whole debt reduction industry. Adds for companies promising to help you reduce debt deluge the internet, radio and TV.
Then there's the government. No fretting there. As opposed to the little people, government borrowing continues to balloon. The latest reason: the recession. Government needs to "stimulate" the economy. Without any money of its own (it consistently spends more than it takes in, even in good times), it has to borrow money to stimulate.
Now comes news about yet another plan to borrow and spend our money. As the government "restructures" the financial industry, it's decided to create a category of institutions that will be designated "too big to fail" (TBTF). The key here is in the categorization.
You see, we've all heard that this or that institution was "too big to fail" (think: all the big banks that have been bailed out recently). The government says we can't "afford" to let them go under. The same sort of logic was applied to Chrysler and GM. And who knows if there won't be more to come. But until now, no particular institution was officially categorized TBTF.
Under the government's latest scheme, when a company is designated TBTF (could be a bank, insurance company, auto manufacturer, etc.), if it gets in trouble, it will be able to borrow (here we go again) at special low rates.
What's the problem with that? Just this. A long time ago, in the 19th century, Walter Bagehot, then head of the Bank of England (Britain's central bank), figured that if banks (theoretically any institution) got into trouble, it should have to borrow at a HIGHER rate than the prevailing interest rate. It was a kind of discipline - you might even call it a punishment - applied to companies who had mismanaged things. Doesnt' that make sense? A LOWER rate essentially rewards a company for screwing up, doesn't it?
One of the issues that came up again and again before and during the recent credit crisis was "moral hazzard." Moral hazzard simply says that if an institution knows it will be bailed out, it will take imprudent risks to make money. Won't knowing you can borrow at a low rate contribute to moral hazzard?
So while we little people fret over debt reduction - while we scrimp and save to get ourselves out of debt - the government creates a privileged class of companies that will be pampered when they get into debt.
Talk about moral hazzard, this is absurd, isn't it?
Then there's the government. No fretting there. As opposed to the little people, government borrowing continues to balloon. The latest reason: the recession. Government needs to "stimulate" the economy. Without any money of its own (it consistently spends more than it takes in, even in good times), it has to borrow money to stimulate.
Now comes news about yet another plan to borrow and spend our money. As the government "restructures" the financial industry, it's decided to create a category of institutions that will be designated "too big to fail" (TBTF). The key here is in the categorization.
You see, we've all heard that this or that institution was "too big to fail" (think: all the big banks that have been bailed out recently). The government says we can't "afford" to let them go under. The same sort of logic was applied to Chrysler and GM. And who knows if there won't be more to come. But until now, no particular institution was officially categorized TBTF.
Under the government's latest scheme, when a company is designated TBTF (could be a bank, insurance company, auto manufacturer, etc.), if it gets in trouble, it will be able to borrow (here we go again) at special low rates.
What's the problem with that? Just this. A long time ago, in the 19th century, Walter Bagehot, then head of the Bank of England (Britain's central bank), figured that if banks (theoretically any institution) got into trouble, it should have to borrow at a HIGHER rate than the prevailing interest rate. It was a kind of discipline - you might even call it a punishment - applied to companies who had mismanaged things. Doesnt' that make sense? A LOWER rate essentially rewards a company for screwing up, doesn't it?
One of the issues that came up again and again before and during the recent credit crisis was "moral hazzard." Moral hazzard simply says that if an institution knows it will be bailed out, it will take imprudent risks to make money. Won't knowing you can borrow at a low rate contribute to moral hazzard?
So while we little people fret over debt reduction - while we scrimp and save to get ourselves out of debt - the government creates a privileged class of companies that will be pampered when they get into debt.
Talk about moral hazzard, this is absurd, isn't it?
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