Sunday, October 05, 2008

Thanks a lot, Congress. You've once again put moral hazard in the driver's seat.

Congress Puts Moral Hazard Back in the Driver's Seat
One of the biggest alarmist arguments for passage of the banking rescue bailout bill was that the credit system was locking up, that soon nobody -- businesses and consumers alike -- would be able to get any credit, and that would drag our whole economic system into the dumpster.

Really? What credit crisis? We've been getting bombarded with credit card solicitations. These came on the day the bailout passed. Perhaps I'm being cynical, but to me the bailout looks a lot like a greedy financial system simply pulling up to the pump and refilling their tanks with $700 billion of taxpayer money so they can once again race down the credit highway and continue doing business every bit as irresponsibly as usual -- until they create the next crisis, probably a credit card crisis, and they come back looking for more handouts to the tune of a few trillion more. People who know they are insured against the consequences of risky but profitable behavior tend to follow their self-interest and practice that behaior even more. That's called moral hazard.

One of my Flickr commenters, ibm4381, posted some interesting background on moral hazard. An excerpt:
The classic example comes from the invention of insurance in Victorian England. It had a very useful purpose, but also the perverse incentive of ship owners to overload their vessels. More money per voyage while they got away with it, and they got made whole by insurance if it sank. The only cure was government regulation on the loading of ships, championed by an MP named Plimsoll. A case where the 'government is never the solution' guys are simply and profoundly wrong.
Has anything really changed? Do we ever learn anything from history? Now that the bailout legislation has passed, moral hazard continues to dominate the financial industry, and the rich keep getting richer. Thanks a lot, Congress!.

1 comment:

"Shorty" Diablo said...

This cratered desolation perfectly symbolizes what you've done to world financial markets, MadGuy.

Yes, you. Remember that I told you I use you as the ultimate contrary indicator. Your calls for $200 oil and skyrocketing prices inspired me to retreat to cash. Thanks! I will stay on the sidelines until you predict the end of Western civilization, at which time I will buy with both hands.

Actually, I do pick up a couple of hundred bucks most days with my new investment strategy, I am happy to share this with your readers. Whenever the market rallies sharply, click over to your online broker and short something--any old thing. Then, work on your Fantasy Football lineups while anxious investors sell into the rally and pound the Dow down again. In a couple of hours, click back over and pocket your winnings. Best not to leave the short position overnight, as some ersatz good news may reverse it--as this morning, when an Australian rate cut occasioned a moment of good cheer. Woot!

Somehow I sense that retailers can expect a disappointing Holiday Season.