NINE

Sweet Subsidies

I don’t know how you measure that subsidy. . . . That’s why they say it’s invaluable.

Mark Zandi, chief economist of Moody’s Analytics, part of the credit rating agency Moody’s, April 2009

YOGI BERRAS SUGGESTION that the content of a pizza might depend on how it is cut is absurd. Yet when banks borrow excessively and economize on equity, the total “pie” available to their investors grows.1 When banks borrow, they benefit from subsidies that they would not enjoy if they relied more on equity. The more banks borrow, the larger are the subsidies, as if the pizza chef added more cheese when the pizza was cut into more slices.

The main source of subsidies for banks is the support the government provides to protect banks, their ...

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