To illustrate one of the pernicious effects of socialism to my classes, I will often ask students what would happen if I decided to minimize failure by taking away points from the A students and give them to the F students. What happens to the incentives faced by hard-working students who get good grades? What lessons are learned by the stereotypical lazy student who customarily just gets by in school? Also, what would likely happen to the overall class performance, over time, when such a grading policy is in place?
It’s sad to see a similar policy being applied right now to the banking industry. But here, banks that correctly identified and reacted to risks are being told that their smarmy competitors are being thrown life-lines in the form of credit infusions, all courtesy of the hapless U.S. taxpayer. And they don’t like it. Today’s Washington Post reports:
Community banking executives around the country responded with anger yesterday to the Bush administration’s strategy of investing $250 billion in financial firms, saying they don’t need the money, resent the intrusion and feel it’s unfair to rescue companies from their own mistakes. …
And in offices around the country, bankers simmered.
Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was “much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government.”
At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. “We don’t need a bailout, and if other banks had run their banks like we ran our bank, they wouldn’t have needed a bailout, either,” Adams said.
Addendum1: Has anyone noticed the eerie similarities between Paulson’s surprise meeting with the chief executives of the nine largest U.S. banks and Hoover’s White House conferences with leaders of industry that began in November 1929? In both cases, the attending parties were given offers they couldn’t refuse. From a New York Times account: ” ‘[The $250 billion banking deal] was a take it or take it offer,’ said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. ‘Everyone knew there was only one answer.’ ”
Addendum2: As others have predicted here, the press is now acknowledging that the initial $700 billion bailout package will potentially cost $2.25 trillion, according to the Times article linked above.