The United States needs to stop propping up banks when they run into trouble, because doing so leads to moral hazard, where the banks aren't responsible for their misdeeds, says Edward Conard, author and former Bain Capital Managing Director.
Governments have propped up banks for years, most notably during the 2008 financial crisis, when the Bush administration passed the $700 billion Troubled Asset Relief Program (TARP), which bailed out the banking sector.
Authorities should help banks deal with any sudden rush to withdraw money, but that's where it should end. Bad loans are the banks' problems, he says.
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"I have no interest in bailing out anybody, quite frankly, and I think banks have to suffer every dollar of loss if they make a bad loan. But there's a difference between making a bad loan that doesn't get paid back and having all the money withdrawn from the banking system," Conard tells Newsmax TV.
Holding banks responsible for their withdrawals could end up the scaring lenders from making loans, which the economy needs.
"Lenders will be reluctant to lend and borrowers will be reluctant to borrow, and we'll be right where we are today, suffering high unemployment and low growth," says Conard, author of the book "Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong."
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"We have to make sure that the banks pay every nickel of loan losses that they create, but we don't want to hold them responsible for withdrawals if we want the economy to recover," Conard adds.
Furthermore, greater transparency is needed to prevent moral hazard.
If banks want government guarantees to protect their loan portfolios, then they can pay for them.
"We absolutely have a problem with moral hazard. I say let's start by not kidding ourselves," Conard says.
"The government is [backing up] the banking system, and we ought to start charging the banks for the guarantees the government is making. We ought to make those guarantees explicit instead of implicit so that we can start to charge the banks for those guarantees."
Bankers won't like the idea, but the economy will respond. It's up to Washington to make it happen, Conard says.
"I think you need leaders on both sides of the aisle that are pushing for the truth of what happened in the financial crisis and the proposals that would set the economy on the right course," he says.
Editor’s note: To preorder 'Unintended Consequences' at a great price — Click Here Now.
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