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The guarantees offered by the US government to ensure the financial system does not collapse have changed the world forever because now expectations are that the same guarantees will be offered in major crises, Elizabeth Warren, the head of the Congressional Oversight panel on the Troubled Asset Relief Program (TARP), told CNBC Friday.
"That's the problem. We get out of it OK but the world will never look the same again," said Warren, who is also a professor at Harvard Law School.
The nominal value of guarantees surrounding the TARP program was $4.3 trillion, even though the TARP itself was limited to $700 billion, and that "tells us how much influence it can have on the market," she said. "That distorts prices in the market and creates moral hazard."
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The good news is that the asset guarantees from the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation helped calm panic in financial markets at minimal cost to taxpayers, she said.
But the government has indicated it will race in whenever there is a major crisis, she said. In the past, state bailouts ensured that shareholders, management and even debtors were hit by the company's failure.
"When we come in and infuse capital and offer guarantees without taking these hits, businesses will start to manage themselves differently. These are free guarantees," Warren said.
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