Thursday, October 16, 2008

Paulson's socialism for the rich

The credit system will crash if everyone is afraid to lend to a bank because a few defaults may put that bank out of business. Thus, it is crucial to increase most banks' capital so lenders know banks are not at the edge of shutting down.

This logic led the Bush Adminstration to invest in some banks. At the same time, the investment is wasted if it flows out of the banks as dividends.

In capitalism, the first line of defense against poor loans is supposed to be the capitalists - not the taxpayers. Congress should have required regulated banks to suspend dividends for at least a year. The Treasury should have insisted (and perhaps still can, in future purchases) that banks suspend their dividend until they have paid off the Federal investment. Such a policy is fair, it reduces moral hazard, and it should save taxpayers money.

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