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Let Profit Guide Government Spending (and Bailouts) January 23, 2009

Posted by federalist in Economic Policy, Energy, Finance, Government Spending.

How can we avoid turning a government bailout into a political boondoggle?  As I suggested yesterday on Rick Bookstaber’s blog:

The expectation of profit is the only way to prevent politics from perverting market interventions. If government can interfere at times and in ways in which it does not expect to make a profit then you may as well tell special interests to grab their sacks and form a line to have them filled with taxpayer money.

But if there is a true financial crisis then, by definition, there is an objective opportunity for a liquidity provider to realize excess profits in the distressed markets.

If we insist that government can only intervene in times and ways in which it can expect a long-run profit (without abusing its power to “change the facts on the ground”), then we take most of the political hazard out of the equation. Instead of the current debate we see — are Paulson and Frank just funneling tax revenue to their friends and cronies in NYC? — the only debate would be on whether the long-run fair value of assets being bought by the government is clearly above the price at which the government can buy them.

(Profit is the same criterion I previously proposed for managing the Strategic Petroleum Reserve.)



1. federalist - February 17, 2009

WSJ notes that the money-market bailout was not only a success, but may also turn a profit:

To insure money funds, the Treasury charged them 0.01% to 0.022% of their assets. It has collected $813 million in such fees, and the agency hasn’t paid any claims yet.

2. federalist - January 24, 2010

Looks like the Treasury Department actually is extracting a profit from its TARP liquidity interventions, by demanding a premium for banks to repurchase warrants they issued to the government in exchange for capital guarantees!

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