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Affluent Investor | July 29, 2017

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Banks Should Have Gone Through Bankruptcy, Not Bailout

(Photo by Alachua County) (CC BY) (Resized/Cropped)

(Photo by Alachua County) (CC BY) (Resized/Cropped)

It was the Treasury and the Federal Reserve Bank of NY that led the rescue of the large bank investors. These banks should have been put through bankruptcy, not as punishment, but to clean up their balance sheets (in sync crony with the 400 odd small to medium sized banks that failed in an orderly way since 2008 under FDIC supervision). Treasury routinely has a conflict of interest because both Democrats and Republican love to appoint their favorite Investment Banker to the Secretary post. That is representative democracy in action! Fortunately, the Federal Reserve scores higher if not always as a paragon of independence.

By giving rescued investors a shared claim on new bank earnings, instead of zeroing the incumbent investors out for their bad decisions, the cutting edge of new investment in loans was discouraged by heavy dilution of their return, and the recovery correspondingly retarded. That was the tragedy for the economy and the poor, not whether a few banks got penalized for their misbehavior; shutting the barn door after the horse got out!

There was more than enough blame to go around–public and private–for the housing bubble and crash. And why would the government, complicit in the housing bubble and crash, spend the funds intelligently? That is a magnificent bipartisan specialty, as was “blame” for the bubble.

Everybody was wildly enthusiastic when Bill Clinton upstaged the Republicans with his Tax Bill to allow all homeowners up to $500,000 in tax free capital gains after a 2-year holding period. As Walt Kelly’s Pogo character put it decades earlier in a different context: “We have met the enemy and he is US.”

Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments with the Argyros School of Business & Economics and the School of Law, and he is part of a team that will create and run the new Economic Science Institute at Chapman.

Dr. Smith has authored or co-authored more than 250 articles and books on capital theory, finance, natural resource economics and experimental economics. He serves or has served on the board of editors of the American Economic Review, The Cato Journal, Journal of Economic Behavior and Organization, the Journal of Risk and Uncertainty, Science, Economic Theory, Economic Design, Games and Economic Behavior, and the Journal of Economic Methodology. He is past president of the Public Choice Society, the Economic Science Association, the Western Economic Association and the Association for Private Enterprise Education. Previous faculty appointments include the University of Arizona, Purdue University, Brown University, the University of Massachusetts, and George Mason University, where he was a Professor of Economics and Law prior to joining the faculty at Chapman University. Dr. Smith has been a Ford Foundation Fellow, Fellow of the Center for Advanced Study in the Behavioral Sciences and a Sherman Fairchild Distinguished Scholar at the California Institute of Technology.

In 1991, the Cambridge University Press published Dr. Smith’s Papers in Experimental Economics, and in 2000, a second collection of more recent papers, Bargaining and Market Behavior. Cambridge published his Rationality in Economics: Constructivist and Ecological Forms in January 2008. Dr. Smith has received an honorary Doctor of Management degree from Purdue University, and is a Fellow of the Econometric Society, the American Association for the Advancement of Science, and the American Academy of Arts and Sciences.

Dr. Smith is a distinguished fellow of the American Economic Association, an Andersen Consulting Professor of the Year, and the 1995 Adam Smith Award recipient conferred by the Association for Private Enterprise Education. He was elected a member of the National Academy of Sciences in 1995, and received CalTech’s distinguished alumni award in 1996. He has served as a consultant on the privatization of electric power in Australia and New Zealand and participated in numerous private and public discussions of energy deregulation in the United States. In 1997 he served as a Blue Ribbon Panel Member, National Electric Reliability Council.

Dr. Smith completed his undergraduate degree in electrical engineering at the California Institute of Technology, his master’s degree in economics at the University of Kansas, and his Ph.D. in economics at Harvard University.

 

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