Subprime Bailout: Good Idea or 'Moral Hazard?'
by Eric Weiner
What might look like prudent financial first aid is, in reality, bad medicine. It's called "moral hazard," and it's a concept any parent of a 5-year-old can understand: Bail out someone who has engaged in risky behavior and you're likely to encourage that behavior in the future. Or, as The Wall Street Journal once put it, moral hazard is ''the distortions introduced by the prospect of not having to pay for your sins.''
We've Been Here Before & we'll be there again & again & again ... Monkey see, monkey do.
We've Been Here Before
In the past, Congress and the Federal Reserve have shown a willingness to rescue ailing industries, and even individual companies. There was the Chrysler bailout of 1979, the savings and loan bailout of 1989, and the airline bailout of 2001, among others. In each of those cases, proponents of intervention argued that the bailouts were necessary to ensure the health of the economy as a whole.
That's the same argument made by some economists now, but not everyone is buying it. "The banking system is in difficulty, but it's not in danger of collapse by any means," says credit analyst Stracke. "It's not as if this is a true emergency."
In fact, the kind of bailout being discussed for the subprime lenders and borrowers is very different from the one that, say, was put together in the 1980s to rescue the failed savings and loan industry. That bailout involved taxpayer money; this one does not. (I am confused here? )
Rather, under discussion are changes to the bankruptcy laws, the rules that govern the Federal Housing Administration or action by the Federal Reserve. The central bank has already cut interest rates several times in the past few months. That spurs economic activity and softens the blow of the bad loans. Wall Street, and some economists, applauded the interest-rate cuts, but not everyone thinks it was a good idea.
"By encouraging risky behavior, he [Federal Reserve Chairman Ben Bernanke] was asking for trouble—and he'll probably get it," wrote William Bonner and Lila Rajiva, in The Washington Post. "Bad investments do not become good ones just because a central bank lends more money to the investors who made the rash choices."
different here in the current scheme, is that the American people seem
to be more aware, i.e. we didn't just elect the father or brother of someone (Neil Bush) who just barely escaped criminal prosecution for his part in the Savings & Loan bailout or John McCain who had his hand slapped by the Senate Ethics Committee for exercising "poor judgment."
Lincoln Savings and Loan
The Lincoln Savings led to the Keating five political scandal, in which five U.S. senators were implicated in an influence-peddling scheme. It was named for Charles Keating, who headed Lincoln Savings and made $300,000 as political contributions to them in the 1980s. Three of those senators – Alan Cranston (D-CA), Don Riegle (D-MI), and Dennis DeConcini (D-AZ) – found their political careers cut short as a result. Two others – John Glenn (D-OH) and John McCain (R-AZ) – were rebuked by the Senate Ethics Committee for exercising "poor judgment" for intervening with the federal regulators on behalf of Keating.
Why not a bailout for the American people (& others) who have been taken in (big time) by the Con Artists (bigger time)? Hopefully history will correct this omission.