With a Detroit bailout, the Fed may become too invested to quit
It's called the behavioral trap. And it's curable.
I'm thinking of selling my shares of AIG. They're just not performing the way the government promised when they purchased them on my behalf. Maybe I'll get some shares of GM instead.
Just as we taxpayers are the owners of some floundering financials, we may also soon own pieces of the Big Three car companies.
The bailouts have been on everybody's lips lately (perhaps second only to speculation about the Obama family dog). Whether for or against, both sides of the debate have been using slippery slope arguments to defend their view.
On the wayward side, the argument goes, a Detroit bailout would spark a frenzy reminiscent of fish pellets in a carp pond. Credit card companies will demand a share; whole cities are already holding up cupped hands; makers of the dog polisher, mesh raincoat, and electric banana straightener will need some help.
On the leeward, let the auto industry slip into oblivion and myriad other industries will tumble down after it. Before long, the entire economy will be in a heap at the bottom.
The aftermath of either scenario looks more like a black hole that even experts can't hope to illuminate than resolution.
But what is certain is that should Detroit (or any others) get the bailout go-ahead, the Fed will find themselves headed straight for a behavioral trap.