Why Banks Need Bailouts

Economist Brad DeLong has an excellent post on banking and risks, Le Citi Toujours Dormer.....
He goes through how Citigroup's giant balance sheet was not in fact run aground by $43 billion in mortgage-related assets, but by the fundamental risk any banks face: deposits (money borrowed from us) must be accounted for as liabilities, while assets (money loaned to others) cannot be valued at their future pay-off, but assessed a risk discount to create an actual asset value.

That risk factor has changed, lowering the value of assets and thus the value and stability of financial institutions.

A tip of the hat to James Surowiecki at the New Yorker blog The Balance Sheet. In The World Turned Upside Down, he posted what he thinks are the two most valuable paragraphs. I think the risk discussion is more important, personally.

Michael Fitzgerald

Michael Fitzgerald writes about innovation and other big ideas in business for publications like the New York Times, The Economist, Fast Company, Inc. and CIO. He’s worked as a writer or editor at Red Herring, ZDNet, TechTV and Computerworld, and has received numerous awards as a writer and editor. Most recently, his piece on the hacker collective the l0pht won the 2008 award for best trade piece from the American Society of Journalists and Authors. He was also a 2007 Templeton-Cambridge Journalism Fellow in Science and Religion.

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