Tuesday, September 23, 2008

Moral hazard

It is a sad day when recklessness is rewarded and prudence punished. The US government bailout of reckless financial institutions is a hard decision to take. The aim is to protect ordinary people from worse consequences if no action is taken. But it goes against the grain.

Perhaps the most pernicious part of this bailout, however, is the way it punishes the innocent to reward the guilty for taking on excess risks they couldn't handle. The moral hazard involved is outrageous. Successful financial institutions like Wells Fargo and US Bancorp, which didn't make all those bad loans, should've been able to start cleaning up by now. Instead, their reward for following prudent financial practices is to see new life breathed into their competition by governmental mandate.
On the flip side, failures like Washington Mutual now get what may amount to a "get out of bankruptcy free" card. As the credit-and-housing bubble formed, Washington Mutual and its excessive risks outperformed the more conservatively managed Wells Fargo in the 2001-2005 housing cycle.
Chuck Saletta, at Motley Fool

But there is no escaping karma. The people and hence the government will demand a reckoning. The bailed-out institutions will suffer in their reputation and hence in their business. The prudent institutions will stand out like the tree on the mountain, even more dignified and virtuous by contrast. And we shall all remember these dark days as a dawning of a new age, an age of heightened awareness of the importance of integrity.

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Discover The Tale of Genji, the 11th Century classic of Japan (click image)

Discover The Tale of Genji, the 11th Century classic of Japan (click image)
Kiyomizudera Temple has a large veranda looking out over Kyoto and beyond