Tuesday, November 25, 2008

Moral hazard and bailout

Um . . . yeah. Look, I think these concerns about moral hazard can be overrated. Looking back on Lehman Brothers, plunging the entire world economy into a downward spiral just to teach a lesson to some uppity investment bankers doesn’t look so smart. But Paulson is proceeding as if this isn’t a concern at all. Or, rather, as if the health and welfare of wall street managers and shareholders is his primary responsibility. Sending such a giant pile of money over to Citigroup without removing the management, without clawing back the fortunes the management earned creating the mess, without adequately diluting the ownership stake of the bailed-out shareholders, and without taking any control on the board of directors is ridiculous. -Matthew Yglesias
This is exactly my position. Totally avoiding moral hazard should not be the main priority right now. Priority should be on preventing further collapse of the economy, which is why the Lehman Brothers decision, although great from a moral hazard perspective, was stupid. But as said above, bailing out should not be focused on executives or shareholders who made idiotic decisions. The bailout should look disadvantageous, but necessary given the circumstances to these groups, with the overall objective being an attempt to stabilize the market. The Citigroup bailout is ridiculous in that it is much more beneficial than necessary to executives and shareholders. There will be winners and losers in this recession and the government should try to ensure, when possible, that those who made the bad decisions be punished by the market. If the government doesn't, the cost will fall back to the taxpayers. Or as Chomsky (I think) said: "Privatize the gains, socialize the costs".

1 comment:

Mberenis said...

The bailout isn't bad for us, it's needed. It's already turning things around. The bailout is causing lenders to practically give away money. You would be surprised at how much cheap and in some cases "free" money is going around out there.

Bailouts for Everyone