Here’s a letter I recently sent to the New York Times:
TO THE EDITOR:
Amar Bhidé argues that “governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks.” (“Bring Back Boring Banks,” Jan. 4).
The lure of profit is why banks take on risk in the first place. But the specter of loss encourages them to be prudent about it. When governments remove losses from the equation, banks lose any incentive to keep their risk-taking in check. Someone else will pick up the tab if a plan doesn’t work, so why not take a chance? Hence the financial crisis.
Capitalism is a system of both profit and loss. Wishing losses away would have consequences quite different from Bhidé’s good intentions.
Washingon, Jan. 4, 2012
The writer is a fellow at the Competitive Enterprise Institute.