Organizations and Markets

A Hopeful Sign

24 August 2009 at 2:44 pm Peter G. Klein 2 comments

| Peter Klein |

At least one major US bank is advertising the fact that it refused TARP funds. Bernanke and Co. must be unhappy, as they insisted that all large banks take the money to avoid tainting those that actually needed it. Wouldn’t it be great if the largest bailout recipients became tarred as Welfare Bums (just as people call G.M. “Government Motors”)? (HT to Lisa Fairfax.)

The irony in all this is that government intervention in financial markets is usually justified by claims about asymmetric information: consumers can’t distinguish reliable from unreliable banks, insurers can’t tell healthy from unhealthy people, and so on, leading to a rash of adverse-selection problems that market mechanisms cannot solve. Actually the reverse is true: low-quality but politically connected financial institutions rely on government intervention to enforce a pooling equilibrium, preventing the market signaling and screening that would otherwise take place.

Entry filed under: - Klein -, Bailout / Financial Crisis, Public Policy / Political Economy.