Moral hazard of the “bailout”

20 November 2008

I think my wife’s sister has it about right:

[I]t has been commented by some of my peers at this bank
that we really missed an “opportunity” by NOT making marginal or
questionable loans – because in the end we will pay the price for the lax
lending without any of the benefit of having collected interest at higher
rates and/or imposing origination fees at the front end.

I personally feel pretty strongly in a free market – my economics background
tells me that while a short term (and that may last years) penalty to the
country as a whole is probable – – government interference with the market
will last generations and in the end cost more.  Businesses are for profit
entities and they need to perform and earn profits or go out of business as
a penalty for mismanagement – – – this applies no matter the size of the
business (autos and mortgage backed securities).  The result of leaving the
market to correct itself will be new businesses, more efficiently run
businesses and real lessons (about risk management) learned.

I think the bail out is a crime, literally.  They are rewarding poorly
managed entities who, minimally were negligent in due diligence and in many
cases were knowingly, without regard to the outcome, mismanaging high risk
assets for an easy, quick profit – which is okay and in line with free
market concepts if the same companies fail and lose when the risk fails to
pay off.


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