I’ll make it clear immediately: I think the Fed bailing out failed companies is a bad idea. It’s clear to me that until there is a real relationship between risk, reward, and failure, we’ll go nowhere fast.
If I’m a financial company, I know that I can risk it all for huge reward (big upside), and get bailed out if I fail (no downside), I’m certainly doubling-down on risk.
And I get why the government is bailing them out: When a financial company fails, many people are hurt. Innocent people. People who had no idea what was going on.
But that’s just the thing: if people did know what was going on, it wouldn’t have nearly the impact.
Here’s a proposal: Instead of trying to fix things after the fact, let’s make some rules for financial companies beforehand. How about the following:
- Every quarter, the financial companies must disclose, in plain language (if Warren Buffett can do it, so can they), what they’re investing in. They don’t have to give away secrets — fairly broad strokes would be fine to get the point across. The key here is to ensure that they’re not hiding information.
- This way, shareholders can decide whether or not to invest their money in the company because they actually know what they’re investing in.
- Moreover, if a company is perceived to be investing in more risky things, why would anyone open an account for the same interest rate as a less risky company? The transparency created here will help keep your “safety” money (emergency fund, etc) safe, and help make you more money on the rest — with the understood knowledge that there’s a higher chance of failure.
- Overall, this transparency will fuel efficiencies in the market, help individuals make more informed choices, and stop the Fed from having to bail out private companies.
Thoughts?
