“Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt,” said [Jim] Rogers, who is now a private investor.
“What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent,” he said. “What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.”
Yep. I have a lot of cash in credit unions that have been bragging to me that they never got involved in the subprime mess. What are they bragging about? It was a *smart* decision for banks to get involved – they made lots of money are weren’t allowed to suffer the consequences of their decisions.
I’m increasingly convinced that moral hazard was a major factor in CAUSING this mess. The banks probably saw everybody making all sorts of money on investments nobody understood and figured the risk was worth taking because of course the government wouldn’t let them all go bankrupt. And they were right.
[i] It is horrible economics [/i]
It certainly is. We’ll be paying the price for years
(1) through a huge increase in the public debt, and
(2) through increased “moral hazard” in the financial system—incentives to take unsound risks next time around in the expectation of yet another bailout. A truly rotten outcome.
Sidney [#1]: You describe a sort of “rational herd mentality” in which the herd was so large that it figured it count count on a bailout. Hence the size of the herd played a decisive role in creating the moral hazard.
Fair enough, but the bailouts have far exceeded what most of us would have expected. I believe moral hazard played a particularly important role in risk-taking by Fannie Mae and Freddie Mac. (Because buyers of their bonds and mortgage-backed securities expected a government bailout, Fannie and Freddie faced little market discipline.)
But in the case of big banks, securities firms, and insurance companies, I’d put considerable weight on (1) herd mentality, (2) boom psychology, and (3) sloppy and self-deceptive risk management.
[blockquote]”What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.”[/blockquote]
“The ultimate result of shielding men from the effects of folly, is to fill the world with fools.” – Spencer
Re # 2
Irenaeus ,
[blockquote] We’ll be paying the price for years
(1) through a huge increase in the public debt, and
(2) through increased “moral hazard†in the financial system—incentives to take unsound risks next time around in the expectation of yet another bailout. A truly rotten outcome. [/blockquote]
And you can add brutal inflation to that list. You can not run these kinds of deficits for eight years (plus what Obama is going to add on) and print money as fast as you can load the machines with paper and ink without devaluing your currency.
Under the mercy,
[url=http://ad-orientem.blogspot.com/]John[/url]
An [url=http://www.youtube.com/watch?v=Gj4pUphDitA]Orthodox [/url] Christian