Funding an incentive for greed


Avro
No Party Affiliation
#1
March 18, 2008
Richard Gwyn

In recent months, two phrases have entered the public debate. One is "financial crisis." The other is "recession."
A third phrase has just joined the conversation. It's "moral hazard," an odd saying that better describes the nature of what's now going on than either of the others.
"Moral hazard" means creating, even if unintentionally, an incentive for someone to commit a crime, or, at the very least, an anti-social act.
The classic example is an insurance company that allows a client to insure their house for far more than its real value. This company has created an incentive for the homeowner to burn it down and cash in the policy.
To deal with the financial crisis and so to head off a threatened recession, the U.S. Federal Reserve has just engaged in a massive exercise of moral hazard. This doesn't make the Fed an immoral institution. But it may have made it a most unwise one.
Being too indulgent to an individual insurance client is a pretty small matter. Doing the same to a major financial company on an issue at the very heart of the contemporary financial crisis risks magnifying the crisis itself because those who caused the crisis aren't being held accountable for it.
And if those responsible for financial incompetence, and greed, pay no price, then, pretty obviously, they, and others, will do the same again. And again.
The current example is, of course, Bear Stearns. This financial company went more deeply into the high-risk, subprime mortgage market than did any other. It was known in the industry for its highly "aggressive" style, a delicate way of saying it skirted to the very edge of the legal line.
This is the firm that the Fed has just chosen to wrap inside a protective bubble of moral hazard.
Effectively, the Fed has just nationalized Bear Stearns, although, since in the U.S. the word "nationalization" is synonymous with socialism, the Fed has got another financial company, JPMorgan, to take it over at a fire-sale price.
Nominally, JPMorgan has bought Bear Stearns for $2 a share. (A year ago, the shares were valued at $170). To cover this cost, the Fed has advanced JPMorgan a $30 billion loan and will itself take control of Bear Stearns' portfolio of financial assets.
None of these financial contortions alter the central fact: a company that was a substantive cause of the financial crisis is being rescued from its own ineptitude.
Moreover, the money to do this is coming from ordinary American taxpayers, many suffering the consequences of that financial crisis in the form of lost houses and jobs.
Here's the real rub. One response to the crisis would be to reach out a helping hand to its victims. This would involve the government getting into the heart of the mortgage mess by guaranteeing the mortgages of homeowners who can no longer keep up their payments.
On the weekend, President George W. Bush specifically rejected this approach.
The remaining alternative is the one the Fed has adopted, backed by U.S. Treasury Secretary Henry Paulson who said he was concerned a "chain reaction" might follow Bear Stearns' fall.
So the company is still standing.
But, as happens with any act of moral hazard, it itself will cause other falls. Word is, speculators are out to run down the share value of other troubled financial firms, counting on the Fed to step in.
The Fed has taken a huge gamble. If it loses, a lot of people are going to suffer for a long time. Very few of them, if any, will be executives of financial companies.

http://www.thestar.com/World/Columnist/article/347139
 
normbc9
Conservative
#2
While the Fed is cutting the interest rate on the Prime all it does is hasten inflation. But think about this. The troubles we are now in financially are eating away at the foundation of out investment banks and other financial institutuions. The rate cuts only temporarily repair above ground level ailments. What is being done to repair the subsurface foundational damage? All I see being done right now are aids to prop up the wealthy.
 
normbc9
Conservative
#3
What we are seeing in the US is the result of many pieces of legislation passed in the both house of Congress on behalf of the banking community which literally passes on to them legally the control of the US monetary and lending systems. The recnt mortgage crisis is but a hiccup compared to what is coming. Their tampering with the credit industry and credit card regulatiions akllowing them fre reign to set up any fees or penalties is now starting to back fire due to resistance from the public. But like the bankruptcies on many local governments it is an engineered setup by those banking interests encouraged by the Council on Foreign Relations which is espousing a one government system for the entire globe. This financial mess is what will unseat the US as the leading industrial nation and it has been seen on the horizon by many who have been warning about its approach for a long time. Well, in my view that time is arriving. As the approaching train is rolling down the tracks it will be interesting to see who gets thrown off.
 

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