Brad DeLong, commenting on Felix Salmon’s post, which was cited by someone else the other day as being a useful upbraiding of dithering Eurocrats:

In the fall of 2008, counting the Fed and the Treasury together, a peak of 90% of Morgan Stanley’s equity—the capital of the firm genuinely at risk—was U.S. government money. That money was genuinely at risk: had Morgan Stanley’s assets taken another dive in value and blown through the private-sector’s minimal equity cushion, it would have been taxpayers whose money would have been used to pay off the firm’s more senior liabilities. “Fully collateralized” the loans may have been, but had anything impaired that collateral there was no way on God’s Green Earth Morgan Stanley—or any of the other banks—could have come up with the money to make the government whole.

When you contribute equity capital, and when things turn out well, you deserve an equity return. When you don’t take equity—when you accept the risks but give the return to somebody else—you aren’t acting as a good agent for your principals, the taxpayers.

Thus I do not understand why officials from the Fed and the Treasury keep telling me that the U.S. couldn’t or shouldn’t have profited immensely from its TARP and other loans to banks. Somebody owns that equity value right now. It’s not the government. But when the chips were down it was the government that bore the risk. That’s what a lender of last resort does.

That’s why Bagehot’s rule is to lend freely but at a penalty rate. The bankers should not profit from the fact that they were over leveraged, and compelled the government to act as a lender of last resort.

DeLong’s been super-useful of late. His vituperative arguments against the Austrian fetish for intrinsic value (goldbuggery) [1, 2, 3, 4, 5, 6] have been delightful, as was this broadside against Nozick.

I do wish his site’s permalink structure wasn’t quite so opaque and broken-seeming.