Budgets, risk, and Knightian uncertainty

Budget season for a certain type of economist is a time for letting the im­agination run riot. So two bad ideas are being propagated so vigorously that, as so many times in the past, good pe­ople are considering adopting these bad ideas.

One bad idea is the creation of a “bad” bank. The other is the reincarnation of a development finance institution (DFI).

A “bad” bank is a financial institution that takes over the bad loans of other banks so that their balance sheets start smelling of roses. It’s the way Indian streets are swept — by moving the dirt from one