Moral Hazard

Bail Them Out? Think of the Moral Hazard!

Downloaded to my Kindle are books examining the origins of the financial crisis which surely would have precipitated the second Great Depression, had the federal government not acted to avert it.

This appears to be a case of having studied history and as a result, having been able to avoid repeating it.

The origins, the history of how we got to the brink is, like all history, one long argument, and surely, there are many factors, but sometimes it helps to be simple minded and unencumbered by too many facts; Alexander, after all, cut through the Gordian knot with a single stroke, seeing a simple solution.

In my case, being simple minded, the story looks clear enough: For years Republicans agitated to rescind the safeguards, the regulations, placed on the American banking system after the 1929 Depression. The Republicans argued our economy could not compete with other economies around the world as long as our bankers were shackled by regulations which prevented bankers from engaging in the imaginative, creative, innovative practices which the rest of the world was developing. Unleash the animal ferocity of market forces, the Republicans cried, and the Democrats, as usual, not having the courage of their own convictions, not wanting to look like the slumped shouldered, wispy voiced wusses the Republicans said they were--the Democrats meekly acquiesced and allowed the repeal of a law called (and I've likely misspelled) Glass-Speigel Act.

So the bankers were now free to take the most carefully examined and reliable form of personal debt--home mortgages--and to buy and bundle these as collateral and sell these as stocks on the market.

Of course, as soon as mortgages became a commodity, the quality of the work which had made mortgages so safe and valuable evaporated, and the brokers didn't care what they were selling as long as they had something to sell, so the bankers rushed to find any names to affix to any paper mortgage and a lot of people found themselves new home owners and that phony phrase, The American Dream, became just that. A dream, not a reality.

Of course, as is true of most shoddy products, these mortgages looked good for fleeting moment but with time, they fell apart like cardboard shoes.

Then the whole thing collapsed, right on President Obama's head.

The Republicans, who had been the instigator of the whole fiasco then blamed it all on Fannie Mae and Freddie Mac, the most available scape goats with a government connection, and loudly decried any form of relief for mortgage holders, for the average guy on the street, for the fools, as a form of "Moral Hazard."

After all, the mortgage holder was fool enough to sign a contract for a house he could not afford--now he had to take his bankruptcy and the loss of his home like any gambler who had lost a foolish bet.

Of course, there was no moral hazard talk in connection with the sleazy brokers or the sleazy bank officers or the sleazy Republican politicians who had built, marketed and sold the cardboard shoes.
No, all the moral hazard belonged to the little guy on Main Street, not to the Wall Street Crowd.

The Wall Street crowd had long since got its bonuses and moved on.