Friday, December 4, 2009

The real cost to business of government guarantees

"There are good reasons why governments should not guarantee the liabilities of any private sector business. Such guarantees are likely to cost money and, in the case of banks, a lot of money.

There are three less obvious but also powerful arguments against such provision. The first is that such guarantees distort competition. Those who benefit will outperform rivals, not because they are more efficient or better at serving customers, but because they have access to cheaper capital. The second argument is that if government relieves companies of business risk, more risk will be taken. This is moral hazard. The third issue is that government intervention gets in the way of private sector initiatives, internal and external, to manage risk, which might be cheaper and less intrusive."

in reference to:

"The most effective control is other parties’ diligence in assessing the businesses with which they deal."
- The real cost to business of government guarantees (view on Google Sidewiki)

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