Monday, October 27, 2008

Friedman on the downside of bank rescues

Yesterday Tom Friedman wrote about the costs associated with the U.S. government taking ownership positions in banks in order to inject capital into the financial system.

There's the financing, an overt cost, but Friedman talks about the implications for risk-taking when government steps in. On the one hand, you might imagine that government ownership would inspire too much risk --- kind of like how Freddie and Fannie, with their assumed government support, extended mortgages too far into the subprime market. But as Friedman points out, another common effect of government ownership is actually to stifle innovation and risk-taking by all but the largest, surest-bet players.