One of the first criticisms to the line of logic I've pursued below regarding finance and politics is: what about bailout guarantees? They increase the moral hazard trade, which allows banks to extract rents from the real economy via the state. See, e.g., this post from Macro Resilience and this one by Derek Thompson.
My answer? That doesn't explain hedge funds, which are not TBTF and do not have a bailout guarantee. Nor does it explain insurance, which might have a guarantee post AIG but not before. Nor non-bank mortgage lenders like Countrywide which certainly didn't have a guarantee.
Keep in mind that the top 25 hedge fund managers made more than the CEOs of all of the S&P 500 in one recent year (I think 2007). If that's not coming from the moral hazard trade, then from where?
The criticism I'd anticipate is that hedge funds don't need bailout guarantees if their counterparties in the big banks have one. But that's clearly not true. Tons of hedge funds have lost tons of money in the crisis, and even Bear Stearns' shareholders were practically wiped out. The guarantee might shore up one side of the transaction but not both, and it takes (at least) two to tango.
IPE @ UNC
IPE@UNC is a group blog maintained by faculty and graduate students in the Department of Political Science at the University of North Carolina at Chapel Hill. The opinions expressed on these pages are our own, and have nothing to do with UNC.
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Tuesday, January 4, 2011
Not Everyone Had a Guarantee
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