Saturday, October 04, 2008

$700Billion USA Bailout - Wither Moral Hazard?

In more normal times the business and financial news stay
in their allocated space in the media, near the backpages or as
an end note on radio and tv with the closing figures for the FTSE100
and DOW indices.

The past few weeks however have seen financial news
spilling out all over the place from the headlines to
political pages and gossip columns. Apocalyptic headlines
presaging the end of the financial world as we know it seem
more apt for the religious pages or publications like The Tablet.

The sight of so many derelict looking houses in USA Main Street
whose erstwhile owners had to quit through being unable to
repay their mortgage loans, does give rise to sympathy
for the residents but hardly for those who encouraged them
to over borrow. By all means bail out the poor old duped
mortgagors but why encourage their lenders and financial advisers,
who should have known better, by bailing them out as well?

I posted on Sharecrazy a few days back:

"The UK govt has imho, forgotten about the investing concept of 'moral hazard'.
The USA bail out plan was likewise thrown out
first time round because electors made
plain their distaste for a plan which
appears to allow those who they consider
to blame to get off scott free.

In the UK the BB. (Bradford & Bingley) bail out
is I believe, to be funded by FSA funds. Essentially this means that good banks
will have to pay for profligate ones.

Such failure to recognise moral hazard by letting the profligate banks sink
but instead, getting the good banks pay for bailing out the bad,
encourages the others not to be good.

I agree that innocent savers should be protected, not to mention the taxpayers
but why should any less than innocent savings institutions?

Also though I'm not a BB. PI (private investor)why
should the shares be nationalised without compensation terms
being specified up front-too much hazard and too little govt. morality perhaps?

Additionally is not the 'credit crunch' caused by overborrowing? If so surely interest rates should go up to encourage saving and to deter borrowing?

Yet in these moral hazardless days, naturally the talk is of making borrowing cheaper by lowering interest rates - a moral hazard-free action if ever there was one.

Also illogical and storing up more pain for the future imho "

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