3 ms·

how does option 1-3, eventually help households, large and small businesses anyways?

• rmrfstar 7y ago
  An economist might make the following argument. Financial systems are like banking systems. Banking systems have two equillibria: run / no run [1]. A bank run can destroy an otherwise healthy bank, and can be a self-fulfilling prophecy. The way we stopped bank runs in the US in the 1930s is deposit insurance and the Fed discount window. 1-3 are modern extensions of those policies. They help households in the sense that they prevent full-scale depressions. This argument is actually true imo, but it ignores the fact that the public could recapitalize the financial system (equity investment) and share in the upside. When you lend to a company near insolvency, the downside risk is identical to the downside risk of an equity investment. So, it is strange that the government favors debt rather than equity. The mental model of "no change of control" predicts this policy choice and others. The proceeds of a public equity investment can be distributed pro-rata through e.g. investments in public health infrastructure or basic scientific research. Norway's sovereign wealth fund is a good example [2]. This very much resembles 4, although it is not a direct cash payment to households. [1] https://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model https://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model [2] https://www.cnbc.com/2020/02/27/norway-wealth-fund-earned-a-record-180-billion-in-2019.html https://www.cnbc.com/2020/02/27/norway-wealth-fund-earned-a-...