Friday, March 28, 2008

Thought for the day

I just heard this:
"Privatise the gains, socialise the losses"
Think the Fed and Bear Stearns.

And to think - I used to go clubbing on Friday nights. Now I contemplate moral hazard. Ho hum.


Anonymous said...

You clubbing?! LOL

Anonymous said...

Don't see many privatising of the gains, fortunately.

Quizbo said...

Another way to think about it would be that in intervening in cases like Bear Stearns, the Fed is working to minimize the socialization of losses. While I would agree there is always some issue of moral hazard involved in a bailout, I think that successful bailouts make it easier to ignore the dire alternatives to bailouts, and also the less obvious costs that generally surround bailouts.

If you let the markets truly take their course in major "corrections", you might find yourself in a much more serious spiral of lack of confidence leading to economic paralysis - the kind of paralysis that generally hurts those on the bottom far more in real terms than those on the top. Personally, I think that considering the potential costs of non-intervention, there is little justifiable reason for a government to attempt to teach some obvious lesson about moral hazard to people whose job it is to take major financial risks.

As for the issue of whether those people are actually taking risks if there is always the prospect of a bailout, the example of a Bear Stearns is rather unrepresentative of the costs of the recent crisis. That is, the bailout was intended to avoid widespread paralysis in the banking system, not to save the jobs of anyone at Bear Stearns. Many smaller firms specializing in the kind of debt vehicles at the center of this current crisis are already out of business, and many, many jobs at the larger firms are being cut as well.

I think we at the bottom often want to see some kind of karmic retribution visited on our cartoon image of the fat bankers lighting their cigars with banknotes and laughing about being saved in another bailout by the friends in politics they have bought off, with the poor taxpayers footing the bill. A more realistic image would be seeing those at the top as representatives of the kind of economic forces that keep our economies running. True karmic retribution would simply take a more extreme form of the punishment we are already seeing - an economic recession that hurts those on the bottom far more than those at the top.

Quizbo said...

Agreeing with this assessment requires accepting Bernanke's own assessment of the Fed (does that qualify as a conflict of interest?), but I do think in the end the Fed is going to much appreciated for being actively interventionist:

There was an error in this gadget