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Bankruptcy means unable to pay one's bills, and writing down loans (assets) in most cases also means writing down liabilities

That is a bold assertion. Are you really sure most of the loans due to be written off contain an automatic put option in their refinancing?

In any event, writing off a loan means that someone, somewhere will not have the money he thought he had. That buck can stop in four places: With the government, with the private bondholders, with the private shareholders, or with the depositors of depository institutions.

The FDIC means that the first and last options are essentially equivalent. So the question is whether the government wants to make good on the claims of shareholders and bondholders to insolvent institutions, or not.

I vote for "not," and if that causes bank runs, well then there's nothing wrong with a bank run that won't be solved by confiscating the bank, decapitating its management (metaphorically or literally, depending on whether it's done by the government or an angry mob), and repudiating every liability not held by an industrial firm or as an insured deposit.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 3rd, 2011 at 06:11:42 AM EST
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