Moral Hazard
Posted on October 22, 2009
Moral Hazard
In one sense, I am appalled by what the White House special master is doing when it comes to setting salaries in private companies. It makes me very uncomfortable to see the government dictate the actions of the private sector.
On the other hand, I think it serves as a cautionary tale for all businesses who think they can go to the government for a bailout. This is kind of like going to the Mafia for a loan. It is not going to turn out to well for the borrower.
It stands to reason that politicians would be outraged that these companies would take money from the government and then go a make a profit. After all, the government is in the non-profit business. Just look at the debts that keep piling up around Washington. It is getting so bad, that pretty soon our debt payments are going to be higher than our defense spending.
Conservatives talk about the need for moral hazard. This is the idea that private sector companies need to have the threat of going belly up. Without that threat, they will continue to take unnecessary risks that will put the company under unnecessary stress which will lead to unnecessary losses.
Well, the Special Master, Mr. Feinberg, seems to be saying: Here’s your moral hazard. Stick that in your pipe and smoke it.
For that reason, I can appreciate why the companies who got TARP money are trying to pay it back as soon as possible. And that should be a good thing for the American taxpayer.
In a wider context, I think that the election of Barack Obama as President has clarified for the American people a few things about what they want in a leader. Hopefully, Obama’s dislike for the private sector is starting to become obvious for most voters. Hopefully, his woeful lack of experience is making it obvious that experience matters. His antipathy for American power will hopefully make American voters appreciate leaders who value projecting it. His inability to make a decision (public option or not; more troops in Afghanistan or not; etc) will help Americans appreciate leaders who can make decisions.
Like those companies who are reminded of the moral hazard of taking bailout money from the government, the American people are reminded of the moral hazard of electing inexperience, indecisive Presidents who don’t trust the market and don’t like American power.