Posts Tagged ‘moral hazard’

Bailout for Business Bloggers

April 20, 2010 1 comment


Why are there no atheists in foxholes? For the same reason there are no free-marketers in a recession: in desperate times, we lose nothing (but our consistency) by crying to a higher power for help, whether that higher power be the God we want to protect us from enemy bullets, or the government we want to save us from our own financial irresponsibility.

And that’s one of the many reasons government intervention in a correcting market is an insidious idea: it lets people get away with putting themselves in bad situations. Which means of course, that they’ll go ahead and do it again.

During the mass panic that was late 2008, all manner of business cried unto the government for salvation, like a people unto their God. Free marketers like us warned that giving money to failing industries was a slippery slope to the kind of massive fiscal deficits we’re seeing now. We were ignored.

It took Larry Flynt, radical purveyor of porn, to point out the silliness of using public money to bailout the auto and banking industries. He duly demanded a bailout for the porn industry. And why not?

Today, we see that such facetiousness was not entirely far-fetched, as airlines are now demanding a bailout in recompense for their losses due to the Icelandic smoke belch. If this continues, we might as well shut down all industry and just all collect our living wage directly from the government. But in the meantime, on behalf of business bloggers everywhere, I hereby demand a bailout. And why not?


Immoral Hazards

October 29, 2009 2 comments
Safely assisting bank suicide

Safely assisting bank suicide

Should big banks be allowed to fail? If you believe in the market’s cleansing efficiency, the answer is yes. Alas, in the gripping drama that was the Great Bailout, nothing is so simple.

When firms fail, the market acts like a brush fire, eliminating deadwood and permitting green shoots to sprout. If they’re artificially kept alive, they not only sit on under-performing capital but also represent a ‘moral hazard’: knowing they will be bailed-out, managers take more risk and govern less carefully than otherwise.

Nevertheless, many believe that large banks should not be allowed to fail due to the supposedly terrible impact on the financial system. However, over 100 US banks have failed since the crisis and no cataclysm resulted. Lehman Brothers died a death and Armageddon failed to materialise.

So obviously, we don’t buy the ‘too big to fail’ argument. And now, with the panic abated, regulators are repenting of bailout fever. The US is trying to curb the Fed’s power to throw good money after bad, and in the UK, regulators are proposing ‘living wills’ for large banks. This will enable them to enjoy a gentle and orderly death in the case of business failure. We approve.