Busted: Bankers and The Global Economy

August 15, 2008

Bailouts and Moral Hazard

house of moral hazard

house of moral hazard

In the past, the federal government has insisted that home buyers shouldn’t be bailed out because of a dilemma called a moral hazard. The Feds are using the concept of moral hazard to define what a bailout is. Apparently, the issue of moral hazard was never a factor in the Fed’s decision to supply the banks with over $1.2 trillion of taxpayer funds, nor is it being considered by Henry Paulson’s proposal to bailout Fannie and Freddie.

A real bailout creates freedom from responsibility through government assistance or guarantees of protection. A real bailout creates a moral hazard; hence, the tendency to behave irresponsibly and take on excessive risk because the penalty for failure has been removed. That is the banking system guarantee by our beloved federal government that backs up banking avarice.

The Federal Reserve and the U.S. Treasury claim that a bailout is necessary because if banks are allowed to fail, the failure will create a loss of confidence and a global financial crisis. In one fell swoop federal nationalization has effectively deleted the risks of “capitalism” at the expense of the U.S. taxpayer.

~E. Manning


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