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Why Is the U.S. Taxpayer Subsidizing Facebook – And the Next Bubble?

Goldman Sachs is investing $450 million of its own money in Facebook, at a valuation that implies the social networking company is now worth $50 billion.  Goldman is also apparently launching a fund that will bring its own high net worth clients in as investors for Facebook.

On the face of it, this might just seem like the financial sector doing what it is supposed to – channeling funds into productive enterprise.  The SEC is apparently looking at the way private investors will be involved, but there are some more deeply unsettling factors at work here.

Remember that Goldman Sachs is now a bank holding company – a status it received in September 2008, at the height of the financial crisis, in order to avoid collapse (for the details, see Andrew Ross Sorkin’s blow-by-blow account in Too Big To Fail.)  This means that it has essentially unfettered access to the Federal Reserve’s discount window, i.e., it can borrow against all kinds of assets in its portfolio, effective ensuring it has government-provided liquidity at any time.

Any financial institution with such access to such government support is likely to take on excessive risk – this is the heart of what is commonly referred to as the problem of “moral hazard.”  If you are fully insured against adverse events, you will be less careful.

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Originally published at The Baseline Scenario and reproduced here with permission.

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Emre Deliveli The Kapali Carsi

Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

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