Revolutionary Moderation

Over? OVER?!? It's not over until we say it is!

First of all, I have to say something you'll rarely hear on this blog: Stephen Harper's government is right. Taxing banks in order to create a bailout fund is a very bad idea. Primarily, it will destroy whatever small sense of moral hazard remained in the market. Not only will a bailout be expected, it'll be guaranteed, so go ahead and continue whatever ridiculous derivative inventing and market manipulation you like, knowing there's absolutely no downside. Responsible institutions get to pay for the mistakes of the irresponsible ones.

This is a better idea, producing big downsides for shareholders and bondholders of irresponsible banks, as well as upper management that is paid heavily in options. It also would make unwinding a failed bank instead of bailing it out more attractive, because the liability side of the final ledger would be missing all of the bondholders that would otherwise expect first claim to the bank's assets.

The market's shedding another percentage or two of its value today, approaching the low point of last Thursday's panicked selloff and immediate bounce. We might be watching the slow deflation of another market bubble, fueled by emergency interest rates and worldwide government debt spending at a rate that can't be sustained. We need to be ready for more choppy waters ahead. We need something smarter than the proposed bank tax.