This is the Cato Daily Podcast for Monday, November 3rd, 2008.

I'm Caleb Brown.

Treasury, the White House, Congress, and the Fed are fed up with banks that have agreed to take bailout cash

and then use that money to buy distressed banks or beef up their own balance

sheets. And since banks aren't doing exactly what the feds want in the realm of lending,

more strings may soon be attached to bailout funds.

Cato Institute Chairman Emeritus Bill Nis-Gannon comments.

Perhaps if I were in the process of designing this plan and I had laid it all out in a certain way and I thought

okay I think this plan is really going to be great and then tried to put into place and found

out that all the people whose incentives I thought

I had designed correctly are not acting in the way that I think they ought to.

I guess I would be pretty upset as well, but that seems to be sort of the

fatal conceit in action for this Treasury plan.

Well, that's correct. They did not think through the incentives, however. They gave the banks more money and they expected the banks to use that money to increase loans.

That doesn't necessarily give them the incentive to make the

loans. They have a huge unfunded debt to their executives in terms of former

promises for compensation.

And in many cases, the banks are not in a position to make new loans in a sense that there

is no particular market for their loans.

Now that will differ a great deal among banks.

The bailout plan has now changed a third or a fourth or is it a fifth time it was originally to buy distressed

assets it was then used to purchase essentially preferred shares in banks.

...