While the mainstream press falls all over itself to continue the mantra of the banks and other huge businesses having to been bailed out by the government, the reality is we’ve been placed in a much worse position now than before the crisis, in what is called moral hazard.
Moral hazard, in the case of the banks and the government, refers to the idea that the banks were too big to fail. So the risk of moral hazard emerges when the banks were encouraged by the government that they will not be allowed to fail and will be rescued if the need arises. What this means is if the banks were too big to fail before, they are now even more too big to fail, as they’re even larger than before the crisis began. That’s what the moral hazard is all about and recognized by everyone as a disaster waiting to happen.
The insanity of this is the government, in a number of cases, through former Treasury Secretary Henry Paulson, forced banks which were healthy to take on poorly run banks with heavy debt loads they couldn’t handle. The result was bigger banks brought upon by the government pressure itself.
I like how John Stossel says it:
“So let me get this straight: The government has encouraged, and in some cases forced, big banks to merge and grow bigger…but they propose now to penalize the banks for becoming too big.
“On what planet does this make sense? The real way to fight moral hazard is to tell these banks that they will be allowed to fail…and then to have the courage to let them.”
A bit more of insanity to add to that is the government spin that it’s the smaller banks which have been depleting the Deposit Insurance Fund, and not the big banks. That assertion is incredulous at the least. The big banks weren’t allowed to fail in order to deplete the fund and reveal the soft underbelly of the FDIC, which couldn’t really protect consumers’ bank accounts without acknowledging it was insolvent and have to tap billions from a credit line.
But as Stossel and many others say, the government should have stayed away from this from the beginning and simply let the free market sort it out. Now they’ve created a monster of their own making which they will have to deal with if something like this crisis ever comes about again.
There will now be far less banking competition as regional banks will have much more difficulty competing against banks “favored” by the government. Or as Camden Fine, president of the Independent Community Bankers of America says, “We will never have free markets again if you have the government picking winners and losers.”
No matter how this is spun, the government has created this “moral hazard” by wrongfully interfering in the markets. Now bankers and other businesses have been emboldened to take on even more risk in the future, knowing the government has decided they’re too big to fail, while the government made them even bigger in the midst of that declaration. If that’s not financial insanity, what is?
