It has been a week since US Treasury proposed the bail out plan (version 1) to save the financial system. A professor of mine described the plan as similar to a student going to a vacation to Phuket and asking 3 mil bucks as travel allowance. When asked about how he's going the spend it, the student answers "i don't quite know how i'm going to use it, but let me reassure you that i'll be responsible about spending it".
Almost all commentators agree that the current condition is a crises of confidence, so taxpayer's money should be used to restore confidence, such that the financial crises does not flow from "Wallstreet to Mainstreet". However, there are huge disagreement to what's the best plan.
George Soro, Nouriel Roubini, and the guys at FPA commented that the is fraught with dangers, such as the issue of moral hazard, the rationale behind socializing losses but not gains, and whether this plan is going to stem systemic risk. Underpinning their arguments, is a common theme that the market economy should be allowed to work, un-disciplined lender's equity should be wiped out and new players should emerge. Some suggested that a model could be Buffett's infusion of highly dilutive capital into Goldman (great for him, but dilutive for existing shareholders), or allowing companies such as WalMart and others with un-levered balance sheet to be granted banking license.
In 10 years time, we will look back to these days as the days where over-levered institutions engulf in flames for their greed. We'll vow to never make the same mistakes again. But we'll surely find new ways to burn, for humans have an enormous relish for folly.
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