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Comment by krschultz | Hacker News Reader

So if big companies can't fail what prevents them from taking a risk that ends up this way in the future? Small companies have the advantage of being able to risk it all, big companies have the advantage of large sums of capital. To upset that balance is to increase the barrier of entry for small players.

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Yes, all these bailouts create what is known as a "moral hazard"

http://en.wikipedia.org/wiki/Moral_hazard

Precisely. Nobody should get bailed, the economy should collapse for a little while and eventually get itself sorted out. The moral should be, "an economy cannot run on practically free credit alone."

The attitude with which these companies have been conducting business would seem to indicate that this is hardly the first time we've created moral hazard.

Well, the government is buying the company out (and, one hopes, firing the CEO and board) and diluting the existing shareholders' stake, so it's more like "big company sucks up insolvent small company for pennies on the dollar" than "government helps cronies by pouring money into badly-run business".

Pennies on a dollar? Do you mean negative dollars because for this "loan", the government has "bought" a two trillion dollar debt, at the very minimum.

IIUC, one reason we're in this mess is that nobody has any idea what the securities at the bottom of this house of cards are really worth; the risk models that were constructed during the inflation of the bubble have been discredited but nobody knows what to replace them with. So private banks weren't willing to hang $85B of their own capital out on the hope that they didn't get any more surprises.

The Fed doesn't know what those securities are worth, either, but they can calculate what preventing a collapse of the financial system is worth, and compared to that, $85B is chump change.

Is the Federal Reserve part of the government?

Yes and no:

http://en.wikipedia.org/wiki/Federal_Reserve#Independent_wit...

I would argue completely no.

The same could be said of incorporation or bankruptcy laws.

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