Bailouts and Moral Hazard

by Marilou Moursund on December 22, 2009

in Banks,Credit Crisis,Recommended Reading,TARP

The constant stream of bailouts out of Washington makes me wonder what percent of our elected leaders have actually run a business or put their own hard-earned money on the line rather than give away everyone else’s money.  The conclusion of this excellent column by John Tamny clarifies much of the discomfort I have felt even as the market has gone higher:

“For too long the media/political conversation has been about who received what from a federal government that lacks any real resources to give anything it hasn’t already taken from the productive. This is truly mistaken on many levels, and most prominently because in order for politicians to bail out anyone or anything, others must by definition be depressed.

Those depressed are the Forgotten individuals and businesses who acted prudently, kept the productive economy afloat, but were forced to witness the ghastly transfer of their wealth to the immature and unstable. Some would say this collectivist wealth transfer was good politics, but it would be more true to say that we ignore the burdens placed on the Forgotten Man at our peril.”

All risk-taking in our financial system has been corrupted by the moral hazard of “too big to fail”, and unless we drastically raise capital levels and reduce allowed leverage, the productive portion of our economy will be slow to trust an environment that rewards speculation and bad capital allocation decisions.

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