Why We Shouldn't Worry If Banks Game The Bailout

Jeffrey Sachs is the latest economist to realise that — gasp! — scheming banks could game the bailout and screw the taxpayers by buying toxic assets from each other.

It’s not just your imagination. It really is everyday that someone trips over themselves to explain just what a scam the Geithner PPIP actually is.

But here’s the thing: that’s a feature, not a bug. The system is meant to be gamed.

Look, the government’s actions all revolve around one overriding strategy: Moving more and more of our private debt to the public ledger. That’s it! There’s nothing more to it. The bet is that the public balance sheet can withstand a lot more leverage before it busts, and that a delevered private sector can return to health.

Thus all these bailout efforts are meant to be gamed. If there were no gaming going on, the schemes wouldn’t be living up to their full potential, because that would represent debt staying in the private sector.

Of course this strategy has drawbacks. For one thing, it’s totally dishonest, because it’s not being sold this way. It also is rewarding failure, maintaining a status quo that’s proven to be unsustainable. And what’s more, if Washington is wrong, and the public balance sheet can’t withstand more leverage, the effects could be catastrophic.

But really, for the bailouts to work, the private sector — and, yes that includes homeowners who are figuring out ways to scam the mortgage mods — needs to “game” the system as much as possible.

After the big transfer is done, we just need to default on our Social Security payments and cut military spending and voila, problem solved.

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