The Swaps Pushout Rule: Much Ado About the Wrong Thing?

A provision of the Dodd-Frank Act popularly known as the “swaps pushout rule” prohibited FDIC-insured banks from entering into certain types of swaps contracts. Congress recently reversed this provision, so that banks can continue trading in these swaps. The reversal provoked an outcry from parties concerned that it would put “taxpayers right back on the hook for bailing out big banks.”[1]

In a new paper, The Swaps Pushout Rule: Much Ado about the Wrong Thing?, we argue that the rule would have done little to protect taxpayers directly from the risks of these transactions. This is … Read more

The Moral Hazard Paradox of Financial Safety Nets

Financial panics are pernicious, but they can be countered with government guarantees of panic-prone debt. In the wake of the crisis, however, Congress has stripped regulators of this sort of guarantee power, motivated in large part by concerns that such powers could exacerbate moral hazard. In a new article, The Moral Hazard Paradox of Financial Safety Nets, I suggest that the moral hazard impact of guarantee authorities in the current system is ambiguous – indeed, it is plausible that guarantee authorities could reduce the (net) cost of moral hazard arising from expectations of government intervention. This supports the view … Read more