Posts Tagged ‘Moral Hazard’

Fairness Of The U.S. Economic System

Friday, February 3rd, 2012

On January 25, Gallup published poll results in a release titled “Americans Divided on Whether U.S. Economic System Is Unfair.”

In the poll results, it is seen that 45% think the economic system is “fair” while 49% think it is “unfair,” with 6% having “no opinion.”

The poll also asks “Do you think the U.S. economic system is fair or unfair to you, personally?”

This issue of whether the economic system is “fair” is very important.  I believe that “fairness” of an economic system – especially that of one considered “capitalist” in nature – is a very complex issue.

While I have many thoughts on the issue, I will defer commenting on the issue of fairness of the economic system primarily because my comments would be exceedingly lengthy and complex.

However, for now, I will say that any discussion of fairness would include the concept of Moral Hazard, which I have previously commented upon.

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The Special Note summarizes my overall thoughts about our economic situation

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Larry Kudlow Comment On January 13 Regarding “Too Big To Fail”

Tuesday, January 18th, 2011

On Thursday, Larry Kudlow interviewed Rep. Spencer Bachus on CNBC.

I found one comment Kudlow made, starting at the 6:17 mark,  to be especially notable:

“Many people believe that the top 5,6,8 banks are in fact too big to fail and constitute government sponsored enterprises in effect.  That is an unfair advantage in the credit markets that is sort of like Fannie and Freddie all over again…you know private profit but public taxpayer risk….”

My comment:

As time goes on, the issues of “Too Big To Fail” and “Moral Hazard” are being discussed less and less, which is unfortunate.  There are many aspects of each of these concepts that are profoundly important to our economic system.

I’ve previously discussed “Too Big To Fail” and “Moral Hazard” in numerous posts…

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A Special Note concerning our economic situation is found here

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“Too Big To Fail”

Monday, December 21st, 2009

The term “Too Big To Fail” is heard frequently. 

However, for all of the talk regarding its danger, very little if anything has been done to rectify the condition. 

As seen in The Wall Street Journal of December 16, p C18, “The top four banks have combined assets of $7.4 trillion, or 56% of the U.S. banking sector’s total.  In 2000, the top four’s $2 trillion of assets accounted for 35% of the total.”

“Too Big To Fail” has many adverse consequences.  Perhaps the most serious is that it potentially fuels moral hazard.

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Moral Hazard Speech

Wednesday, October 21st, 2009

Here is a link to an October 20 speech given by Mervyn King.  The speech speaks of the concept of Moral Hazard:

http://www.bankofengland.co.uk/publications/speeches/2009/speech406.pdf

Although there are various notable passages, I found this line perhaps most interesting:

 

 “The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history.”

I have commented on Moral Hazard previously on this blog.  As I have noted, there has been very little (especially relative to the size of the issue) commentary or attention given to the issue.  I believe the Moral Hazard issue is of the greatest importance. 

Moral hazard should have been addressed via credible policy many years ago.  I am certain that by neglecting this issue we will see immense damage.

 

SPX at 1098.22 as this post is written 

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Bank Bonuses and Broader Implications

Monday, August 3rd, 2009

I’d like to make a brief comment about the “bank bonus” story that came out a few days ago.  Here is one article on it, titled “Bank Bonus Tab: $33 Billion” from The Wall Street Journal on 7-31-09:

http://online.wsj.com/article/SB124896891815094085.html#articleTabs%3Darticle

Needless to say, it seems outrageous that such bonuses, in said amounts, were paid out so broadly in 2008 given the overall situation – especially for those banks that would have otherwise collapsed absent tremendous levels of government intervention.  Of course, there may be some mitigating factors or legitimate reasons for at least some of these bonuses, but I have yet to read or hear of any.

It seems as if this bonus issue should have been adequately addressed before any intervention funds were allotted to the various banks.

Overall, I think the two major issues concerning these bonuses are Fairness, as well as the impact on Moral Hazard.

As I have alluded to previously (on a 6/21/09 post) the Moral Hazard environment that has been created and perpetuated over the last few years is truly epic and mind-boggling.  It appears as if this Moral Hazard situation has only been exacerbated with the Bank Bailouts that have occurred during The Financial Crisis.

Moral Hazard implications are very important, even if (seemingly) few people really want to think about them.  Moral Hazard has many types of direct and indirect effects ranging from our potential National Debt to issues regarding Sustainable Prosperity to issues concerning Fiduciary Responsibility.  Part of the challenge, and importance, of crafting appropriate national policy is to consider, in totality, how the economic environment will be impacted by various government actions.  To ignore, or downplay, Moral Hazard implications is a serious mistake.

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Moral Hazard Wonderland

Sunday, June 21st, 2009

To date, I haven’t written or otherwise commented about the issue of Moral Hazard.

Perhaps the main reason is that I am afraid if I start writing about it, I may never stop…

Needless to say, the issue of Moral Hazard and its implications are massive, and just seems to grow with time.  It seems as if the issue has taken a “back seat” for quite a while now, and, paradoxically, seems to have become even less of an issue, policy-wise, since The Financial / Economic Crisis began.

The following is an interview with FDIC Chair Sheila Bair which discusses the Moral Hazard topic and related issues:

http://www.cnbc.com/id/31443313

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