In the good old days, you might invest in something risky to increase your expected return, but you understood that you could lose everything. Fortunately, you now have an alternative -- hostage investing. Invest in something with a very high expected return, but something that is so core to the health of the overall economy that effectively, the entire country becomes hostage to the success of the investment.
We've had some form of this for quite a while, as the government has been insuring savings and loans institutions for years. In theory, the government will regulate those industries it will bail out in case of emergency, to prevent them taking advantage of the government guarantee to invest in extremely speculative opportunities. That didn't work all that well in the 80s and 90s, when the government had to bail out the S&Ls to the tune of $125 billion.
Now, though, even more types of investments have managed to intertwine themselves so deeply that the government is hostage to their failure, requiring a bail out if the investment sours. The 1998 collapse of the hedge fund Long-Term Capital Management forced the Federal Reserve to arrange a $3.6 billion private bail out. Now, with Bear Sterns and the housing market, the government will swoop in, capping the maximum loss of investors or home owners without requiring an additional share of the profits in case of financial success.
With the government now ready to loan money directly to investment banks, the opportunities to take the nation's economic future hostage become more enticing each week. What could be better than using government money to speculate? In the worst case, you lose the government money and fold your investment bank. In the best case, you make a fortune off the risky investment and pay the government loans back at an interest rate completely uncorrelated with the risk of losing the money you have been lent.
If it's that necessary, we better look at decentralizing the critical industries so we don't have to do it again. Let the businesses fail, and let the government's only role be to agree to guarantee insurance claims that have to be liquidated as part of the end of insurance companies like AIG.
Bear with me for a second here (pun intended) A man was walking in the forrest when suddenly he was struck in the chest by an arrow. He laid there for hours dying until eventually being found by some nearby villagers. However instead of instantly tending to the mans wounds the villagers inquired how he came to be struck by this arrow.The injured man, barely hanging to life was unable to respond, so the villagers began to hypothesize, then debate, and then eventually argue … more
I mostly write about my main obsession, tennis. When I'm not experimenting with new tennis racquets, I love to watch a good movie or read a great book. I'm a fan of both non-fiction (especially books … more
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