This week I have spent most of my time researching on the bailouts practice in America. The Central Bank, as many people agree, has a role as the lender of last resort who is willing to provide liquidity to an illiquid bank. By rough definition, there are two types of “bad” banks: the insolvent one, and the illiquid one. The latter is “less bad” than the former. A bank is insolvent when its assets value goes down, hence its net worth becomes negative. This is often because a bank is imprudent in its lending, resulting in a big portion of non-performing debts on its asset side. During crisis time, when these assets go down in value enough, a bank becomes insolvent. In theory, this type of bad bank does not deserve help, and should take the bad consequence as punishment in the competitive environment. Alternatively, a bank can be illiquid, which means that it is just unlucky that many people, for unconvincing reasons, show up to demand cash at the same time. This bank deserves help, since it has done nothing wrong. The problem is, it is often hard to distinguish an illiquid (unlucky) bank, and an insolvent (bad) bank. Hence, the government, even with good intention, may end up bailing out the bad bank as well.
To make a really bad analogy, in research, there is an unmotivated researcher, and a bad researcher. An unmotivated researcher, like an illiquid bank, generally is a decent researcher who does nothing wrong, and he is just unlucky that no idea comes up at a particular point of time. A bad researcher, on the other hand, takes on many imprudent actions (not trying hard enough, not having the brain to be a researcher, etc.) and simply deserves to fail and be kicked out of the field. Now, that’s me right now. It’s not clear to me which type I am.
Let’s hope I’m the unmotivated one.