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Moral Hazard cont…

February 2, 2010

(continued from here)

During one of my recent discussions with the brother-in-law, I found myself on a very irrational side of an argument.  I says- “Alex, since the Banks took tax payer funds those bastards should lend like the govt has asked”

Looking back, this was a horrible argument.  The Govt has no business telling private institutions how to run their business – whether this means making loans or fuel efficient cars etc – Those of you who disagree with me should visit the DMV on 34the st (or any Post office in Brooklyn).  The Govt has no business – in business period.  never mind the conflict of interests.

Ha, I just saw a BOA commercial.

“Bank of America – we just made 60 Billion in loans to help the community”

what the caption really should say:

“Bank of America – Dont hate us because of TARP – We still make loans to people who really don’t qualify for loans because Obama told us.  – these loans will be non performing almost immediately but we will try to package said loans into an ABS and sell it to the Govt via PPIP  (mortgages to FRE/FNE) – so really, the idiots watching this commercial are really making the loans”

Anyhow – So, if the govt invests in / bails out a private company do they now have “the right” to tell these institutions what to do / pay their employees etc..? Is this Capitalism?

What the fuck is Capitalism anyway?

Merriam-: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined by competition in a free market.

I’d like to highlight the word “free” in that definition.  No government meddling.

When a government takes over an operation the first thing to go is fear, as the govies have unlimited tax payer dollars to cover any losses.  A political haze takes over greed and in no time the operation has unmotivated employees and is bleeding cash.  More on Feddie and Fannie later..

Decisions made to increase profits and/or avoid loses are based on fear and greed.  A company is free to be greedy (make risky loans) but this may result in failure so greed is tempered by fear.   Most businesses find the happy equilibruim.  Some greedy companies take too much risk and either fail or become wildly profitable but never both.

Until now.

The equilibrium between greed and feer is broken by govt intervention.

When the govt takes away the “freedom” to lose money, the equilibrium naturally swings towards greed thanks to bail outs.

The law of unintended consequeces and Moral Hazard.  Again, my favorite quote:

“Treason doth never prosper; what’s the reason? For if it prosper, none dare call it treason.”

“Moral hazard: occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk.  Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its doings, and therefore has a tendency to act less carefully than it alternately would, leaving another party to hold some responsibility for the consequences of those actions.”

So if I am an investment bank and I almost blew the fuck up due to bad/risky bets and I needed to be bailed out (for the greater good of the country right?) do you think I am going to learn a lesson and be less risk going forward?

“July 15 (Bloomberg) — Goldman Sachs Group Inc. ratcheted up risk-taking to an all-time high in the second quarter, increasing equity bets 58 percent to amass record trading revenue and quarterly earnings.”

Guess not – and this isn’t just GS..  All the banks ratcheted up their prop trading desks.  Except Morgan and that got their CEO shit canned.

We didn’t take as much risk as we could have ,’’ said Morgan Stanley Chief Financial Officer, Colm Kelleher in explaining the firm’s trading revenues.

In summary – I feel the crisis was caused by govt meddling / intervention and Moral hazard and not by capitalism.  The banking industy is the furthest thing from Capitalism on account of Moral hazard that is the Fed (which was created as a mechanism to control the supply of money and backstop the economy)   Banks are also insulated from risk by FDIC – which allows banks to play with your deposits and if the bets go sour these deposits are insured by the Federal Govt..

Lets see if VOLKER can put an end to this…..


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