In the film Other People’s Money, Larry the Liquidator Garfiled said: “You can change all the laws you want. You can't stop the game. I'll still be here. I adapt.”
Well, maybe, but John Carney notes a special problem with the government’s guarantee implicit in letting ten big banks out of TARP. It’s not just moral hazard, but the “calculational chaos” that results when the market no longer fully prices the risk of failure. The cost of failure still exists, but if market participants don’t feel it then the market can’t send the right signals in response to banks’ decisions.
And the government can’t simply reverse this decision, because that could cause the very panic it was trying to prevent by the initial action.
Messing with markets isn’t as much fun as it might seem.
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