Now that the Treasury Department is offering better terms than the market for banks seeking new capital, we shouldn’t be surprised that there is plenty of demand for the cheap capital (via WSJ):

WASHINGTON — Treasury and banking regulators say as many as 1,800 publicly held institutions could apply for government investments in coming weeks, out of concern that failing to do so could make them losers in a banking sector reshaped by the Treasury’s $700 billion rescue plan.

If your competitors are getting cheap capital you almost have to get in line yourself. The Treasury capital injection plan is distorting the market by offering essentially the same terms to all comers. In the real world, bad banks would have to pay a higher price for new capital. In the brave new world where we are all equal, past business performance is not considered a good indicator of future business performance.

Every government bailout to date has, in some way, rewarded those who acted recklessly and punished those who acted prudently. I fail to see how that will reduce reckless behavior in the future or encourage prudent banking practices. What regulation could possibly overcome the message now being sent to the banking industry?

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