The Corner

Even the IMF Recognizes It…

An IMF working paper says what bailout proponents need to hear:

Governments have employed a broad range of policies to deal with financial crises. Central to identifying sound policy approaches to financial crises is the recognition that policy responses that reallocate wealth toward banks and debtors and away from taxpayers face a key trade-off. . . .

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Schumpterian creative destruction needs to work. Financial markets need to be free to innovate replacement products at their own risk. Moral hazard needs to end. If even the IMF realises this, there’s little excuse on Wall Street and in the Treasury Building.

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