'....it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture. But if it is so simple, why has no expert mentioned it?I don't like the idea of the 'captains of the universe' and the greedy investors claiming huge profits and then seeking to socialise the disasterous losses they impose on themselves and society. But my anger directed at this lot, strong as it is, is tempered by the view that a lot of innocent people get hit in any major financial collapse. I'll let the financial experts work this one out but I am always surprised at how destructive errant financial markets can be when they run amok.
The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain. Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition'.
On this last point Gary Becker, while pointing to the costly implications of the bailout for future financial market moral hazard (future financing will be biased toward bonds rather than equity) and the unfortunate US taxpayer, broadly would agree with my caution. He writes:
'Despite my deep concerns about having so much greater government control over financial transactions, I have reluctantly concluded that substantial intervention was justified to avoid a major short-term collapse of the financial system that could push the world economy into a major depression'.