Monday, September 8, 2008

When should the state step in?

Although the mega F&F bail-out package spread cheer in most economies, there was unmistakable cautiousness that it will not keep the markets bouyant for long. Banking stocks in general rose, but scrips of those Asian banks that have a higher exposure to the F&F debt are faring better than the others.

That it was inevitable for the US government to intervene is taken, but the practice of governments (UK-Nothern Rock) of bailing big firms raises questions. Is it a good regulatory practice to bail out ailing financial institutions (FIs)? A decision like this one will have to be done keeping in mind the consequences of not bailing out those FIs that could pose a systemic threat.

The broader point still emerging out of all discussions in print and on-line how soon should government get out of playing an active role in the mortgage business. And how healthy is sovereign debt? Should there be a more comprehensive policy that lays down conditions under which governments are authorized to step in. The short term goal of giving the markets a shot in the arm will be served by this bail-out, but what remains to be seen is the long-term impact on the U.S. exchequer and world in general.

p.s. Its funny, we live in times where there are sponsored links that say "Is your bank in trouble? Click here to check out the list of banks doomed to fail" and so on. Well as they say, there is a season for everything.

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