As a Doctoral student in Business Strategy, people often ask me what I think about the recent slew of government bailouts of banks. Well, there are two sides to the debate, which I outline here.

1. Bailing out banks sends exactly the wrong message. Basically, it lets banks know that they cannot fail no matter how poorly they do. This RAISES incentives for banks to make more bad loans in the future. Think about it. Say you are the CEO of OMNIBank and you have an investment choice: you can take a risky investment or not take it. If you take it and it pays off, you get rich. If you take it and it fails, you get a bailout. If you don't take it, people accuse you of missing a golden opportunity. The best play here is to take the investment. Therefore, there should not be a bailout as it encourages more risky behavior.

2. On the other hand, people are panicking, and something needs to be done. These arguments mirror somewhat arguments that were made over FDR's New Deal: It may not help directly as much as it should, but it does make people think something is being done which prevents public panic. If the bottom of the market could fall out without a panic, that would be one thing, but that is not realistic. The government must act to soothe the minds of the people, so there should be a bailout.

As much as I hate to say it, I think option #2 is the best one. I would love nothing more than to NOT spend $700,000,000,000 to buy worthless assets from banks, but it does at least prevent a panic, which only makes a bad situation worse. Since it is the lesser of two evils, we should be bailing out banks.

By the way, my name is Ryan and this is a new site I am building. I would like to make this site part blog, part article archive, and part forum. If you have any ideas on what this site needs, or if you know how to draw attention to new sites, please send me an e-mail!

Ryan