Mr and Mrs Moral Hazzard

by digby


This is just brilliant. For those of you who are wondering what the hell happened and is happening with the banking bailouts,(and why some people who should know are saying the system is "shakier than ever.") Chris Hayes and Nomi Prins have put it together in a way that anyone can understand.

Here's an excerpt:

Imagine a couple living in a three-bedroom house outside the Twin Cities. Call them Joe and Katie Hazzard. The Hazzards own a small off-track-betting (OTB) business and have some investments and a mortgage on their house. But business is terrible (no one has extra money to make bets); Katie recently lost her job; their investments have hemorrhaged value; and they can't make their mortgage, car or credit card payments. So they ask their local bank for a loan. "No dice," says the bank. "We can't give you money to pay your debts because you're no longer a good credit risk for us." That's more or less what happened to the banks last fall: they couldn't and wouldn't lend to one another.

Capital Injections and Direct Loans

So the Hazzards go to the Federal Bailout Bank, which says, "Here's some money. Do with it what you want, and someday down the road, if and when you're out of the woods, you'll have to pay us back with a little bit of interest." That's roughly what the $700 billion TARP was: a direct injection of capital to purchase preferred shares, which is really more like extending a loan than making the investment the government said it was, with some very light strings attached.

But then Joe says that the handout isn't enough. It turns out that not only does he own a gambling business; he has a bit of a gambling habit. Joe made big money in previous years betting on the New England Patriots to win the Super Bowl and figured he couldn't go wrong placing the same wager again. But then Tom Brady injured his knee last year, and Joe got creamed. Inveterate gambler that he is, he's doubled down on the Patriots this year, but he won't be paid off (if, that is, the Patriots win) until later in the year. But Joe has a boatload of outstanding gambling debts he needs to pay now.

So the Federal Bailout Bank decides it'll help out...


That's just the beginning. It turns out that Joe has many more serious problems of which nobody was aware and at each stage of revelation, requires more funds from the government.

The parable doesn't cover everything, which the article discusses at some length. But the point is that by propping up these banks they way they did --- with little accountability and few requirements at the beginning, we have created a situation where they are doubling down on their bets with the full knowledge that the only risk they bear is on the upside. That's very scary stuff.

And it doesn't look like anyone's likely to do anything to head that off:


Imagine if the Hazzards started using some of their easy money to hire lobbyists to make sure the Bailout Bank maintained its pro-Hazzard policies. Because that's what's going on. Banks are lobbying Congress very hard to maintain their setup. Just one year after the crisis, boasting record profits and on track for record bonuses, they are darkly warning that any new regulation could hamper growth.

Given the banks' newfound publicly sponsored financial health, Washington has little incentive to rock the boat by proposing serious reforms. True, some necessary steps are being discussed by Congress: it's important to have a Consumer Financial Protection Agency to counteract the damage caused by lax oversight, and higher capital requirements so that banks can pay for their own risk fallout. But the Fed should not be the premier risk regulator, nor should we believe that it will cap extreme bonuses--President Obama doesn't even support a cap. Parts of the media are already reporting the end of the recession; Obama has moved to reappoint Bernanke, crediting him with keeping the country from a Great Depression, and has given tacit approval to the free flow of bank subsidies. The Treasury, headed by the man who was at the helm of the New York Fed when it nearly went down, is no less culpable for bad decisions.


I saw the Michael Moore film the other night (which I'll write about later) and Moore was there. In response to a question by someone in the audience about Summers and Geithner he compared Obama to a banker who hires bank robbers to tell them where the security vulnerabilities are. He said he hoped that was the plan anyway.

I actually think it's something else. I think they simply wanted to get things "back to normal" and trust that the "the market" will fix itself. (Wall street types are probably the world's greatest believers in the magic of the market.)Booms, busts, bubbles and crashes are not a systemic problem to these people. For the most part, they all survive quite well personally --- they have plenty of money to tide them over during the down turns from the times when they are swallowing fire hoses full of money when the markets are roaring. And the institutions they work for, which might possibly take down the entire system, are now 100% guaranteed by the US treasury, so they no longer face any serious risk at all. The risk all rests with the average person whose dreams are derailed when things go wrong and who can't afford to try anything new because the personal cost is too high. Win win for the MOUs.

Many of these people at the top of the financial food chain are nothing more than gamblers with other people's money who have a faith-based belief in the "free market" that will always save them in the end --- and if that doesn't work the government will. The problem is that they are also considered to be the experts who will save the system itself. It's very hard to see why they would even if they could (and I seriously doubt they can.)

You'll recall that the man who was allegedly the smartest man in the world, the Oracle of Rand himself, only recently found out there was a tiny little flaw in his free market, libertarian philosophy:


"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Mr. Greenspan said.

Referring to his free-market ideology, Mr. Greenspan added: "I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact."

Mr. Waxman pressed the former Fed chair to clarify his words. "In other words, you found that your view of the world, your ideology, was not right, it was not working," Mr. Waxman said.

"Absolutely, precisely," Mr. Greenspan replied. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."


Problem solved. These banks and financial firms are now "too big to fail," so their participants' only self interest is in getting as personally rich as they possibly can. Which is what they always believed anyway. All hail Mistress Ayn.


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