Moral Hazard and Protecting the Taxpayer
What? You've been doing business with the 4th largest investment bank in the country? How imprudent of you! We can't allow such rashness to be rewarded. No, we must let the market punish you for your imprudence. Otherwise, it will encourage people to do such risky things in the future -- expecting the risks to fall on the taxpayer.
Yes, it is the taxpayer that we are trying to protect. The taxpayer cannot accept the consequences of your imprudent actions. Never mind that, given the possible economic impact, most people who pay taxes will face even greater risks than the they would if the government had facilitated a sale by guaranteeing some of Lehman's assets. The Treasury's obligation is not to the people who pay taxes. It is to the taxpayer!
Yes, it is the taxpayer that we are trying to protect. The taxpayer cannot accept the consequences of your imprudent actions. Never mind that, given the possible economic impact, most people who pay taxes will face even greater risks than the they would if the government had facilitated a sale by guaranteeing some of Lehman's assets. The Treasury's obligation is not to the people who pay taxes. It is to the taxpayer!
posted by knzn at 9/15/2008 08:39:00 AM
3 Comments:
If the voters wanted the government to protect them, they would not have elected George W. Bush after the initial trial period had demonstrated what he had in mind, would they?
Seriously, the talk of "moral hazard" and "protecting the taxpayer" is just a thin rationalization for simply not having the resources to bail out all the banks that need bailing out.
That housing bubble you thought did not exist -- well, it burst and it took one-quarter, or ~$6 trillion in residential real estate value with it, and another ~$2-4 trillion in commercial r.e., as well, I suppose. That translates into a loss of mortgage loan value of $1.2 to $2 trillion.
Maybe $600 billion, or, at most, half, of the total loss to banking, finance and investors, has been accounted for so far. And, the Fed and Treasury see the bridge to nowhere as a bridge too far.
But, of course, if you are Treasury Secretary, you cannot responsibly say that. So, you say you are "protecting the taxpayer", when, what you are doing is letting the country's economy shoot the rapids, and hoping for the best out of a very wild ride.
"not having the resources to bail out all the banks that need bailing out"
But ultimately the government has a resource called (in the standard trope) the printing press. In this situation it makes sense to use that resource, because the major risks are deflationary.
I still BTW say that there was no housing bubble, only a credit bubble that supported a strong housing market. I will acknowledge, though, that I didn't notice the credit bubble, and obviously if I had noticed, it would have changed my opinions about the housing market. But in my defense, most people who said there was a housing bubble didn't notice the credit bubble either. Or didn't pay much attention to it.
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