Austerity — a class-specific put-option

10 Mar, 2015 at 10:09 | Posted in Economics, Politics & Society | 1 Comment

article4bWhen you bail out a bank or a banking system, you are not just bailing the bankers. You are bailing the savers, the pensions, the mortgages, the derivatives written on these loans and annuities, and all the rest that constitute the bank’s assets, which are your liabilities and vice versa. So when governments bail banks they are simultaneously bailing the assets and incomes of the top 30 percent of the income distribution …

The cost of exercising the put-option is paid for by people who don’t have many such assets and rely on government spending and public goods, but that’s what gets cut. The poorest segment of society is forced to pay out on an insurance policy that they never agreed to guarantee, and for which they never received a single insurance premium from the holders of the bailed (i.e. insured) assets. This is why austerity is best thought of as a class-specific put-option. It’s free asset insurance for the top end of the income distribution, those who also just happen to be the people that vote most and fund elections.

Mark Blyth

1 Comment

  1. Coincidentally, I’m reading the book this quote comes from right now. The writer is certainly “on the side of the angels” but it surprising how confused, short-sighted and, to a certain extent, inaccurate his arguments are.


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