Editore"s Note
Tilting at Windmills

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December 12, 2007
By: Kevin Drum

MORAL HAZARD....Atrios takes a look at the Fed's latest bailout plan and says:

I don't claim to be an expert on the mysterious world of high finance, but it's hard not to perceive that this latest Fed action is rewarding bad behavior.

Of course it is. When it comes to rescuing large financial institutions run by rich people, the party line is that we need to put our emotions on hold, save the system, and not get caught up with making petty moral judgments. Moral judgments are only appropriate when it's some working class schmoe who's done something either stupid or unlucky. Understood?

Kevin Drum 12:59 PM Permalink | Trackbacks | Comments (26)

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I'd say, whatever companies the tax payers bail out, we should own. Fold them all into the public sector, or buy, restructure, and flip. Salaries at the top frozen, layoffs and forced retirement starting with the top.

Foreclose on the companies. Evict the executives. Pay for lower and middle class tax cuts, improvements to education and healthcare, and life time investigations and punitive actions against all Republican leaders, who can reasonably be assumed to be corrupt enemies of America.

Posted by: Trypticon on December 12, 2007 at 1:13 PM | PERMALINK

You make a good point! If applied correctly during the crisis time of its manifestation, the War on Drugs would have begun in the boardrooms of our financial sector as some of those institutions had no moral problem laundering drug money that found its way into their institutional coffers!

But, alas, it was so much easier to pick on some poor old middle class user than it was to go after the profits that sustained such activity. -Kevo

Posted by: kevo on December 12, 2007 at 1:14 PM | PERMALINK

Not only rewarding bad behavior, but, it has no incentives for improved financial behavior, budgeting, etc. And, it won't really help anything, it makes U.S. loan contracts more suspect to mortgage buyers, especially international ones, and to the degree it purports to "solve" anything, it just pushes problems down the road again -- in other words, a typical Fed-type solution.

Plus, there's no guarantee it will make the market that much more right-side up, or make any of these loans that much better after the freeze wears off.

Nor, given stagnant wages, is there any guarantee that first-home buyers will have that much more money in 2, 5 or however many years.

As for people buying second or third homes as investment vehicles, or even larger-than-needed residential homes for the same reason?

Screw 'em. It's just like playing the stock market, and you lost.

Posted by: SocraticGadfly on December 12, 2007 at 1:14 PM | PERMALINK

Well, Andrew Mellon didn't feel that way, but I didn't notice that history or liberals have been too kind to him. Drum is starting to sound like Barry Goldwater or Ron Paul, railing against the FDIC as a subsidy to the banking industry.

Posted by: y81 on December 12, 2007 at 1:15 PM | PERMALINK

Trypticon and Keno only look at half the issue. The freeze also rewards bad behavior by home buyers. Dammit, liberalism is not supposed to mean consumer irresponsibility, either.

Posted by: SocraticGadfly on December 12, 2007 at 1:17 PM | PERMALINK

There's no doubt that it is rewarding bad behavior. But the Fed and the other central banks knows this, too, and it's taken a long time to get to this point. The bad behavior was obvious in the spring, and markets started melting down in the summer.

The problem at this point is that the system still hasn't recovered, and the alternative, to let banks go bust, isn't very attractive either. If banks go bust, everyone will find it harder to get new home loans (though I doubt it will stop the endless credit card offers we all get.) The banks might get bailed out, but the only investors with deep enough pockets these days are governments like China's and Dubai's - UBS just sold part of itself to Singapore yesterday. Americans wouldn't like our banks getting bought up in a firesale to authoritarian governments, either.

Posted by: JimVA on December 12, 2007 at 1:31 PM | PERMALINK

Right!

Immoral = having something to do with sex or intoxicants!

lying, cheating, stealing, undermining democracy, killing, torturing: not immoral!

Morality is about pee-pees and vajayjays, Kevin. I don't know how much clearer the GOP can make this...

Posted by: Winston Smith on December 12, 2007 at 1:40 PM | PERMALINK

What is diffult to understand is why the major oppostion party to the Big Bank Party of the Rich has almost the exact same policies regarding rewarding bad financial behavior of financial institutions, and why Schmoes support it.

Posted by: Brojo on December 12, 2007 at 1:41 PM | PERMALINK

Well, did you ever try to get a home loan from "some working class schmoe"?

People, this is not a moral issue. Have any of you stopped to consider that if we simply cut taxes on the banks the free market will sort this out?

Posted by: tbrosz on December 12, 2007 at 1:45 PM | PERMALINK

People, this is not a moral issue.

Wall Street ripping people off to the tune of hundreds of millions, even billions of dollars isn't a moral issue? That asshole at Citibank who ran the company into the ground getting a $140 million bonus for failing at his job and getting shitcanned isn't a moral issue?

But a black guy on welfare stealing a case of beer after Katrina hit New Orleans, that's a moral issue, right?

Posted by: Old Hat on December 12, 2007 at 1:49 PM | PERMALINK

Has anyone noticed that Kevin has been a bit crankier the past few weeks? While I hope all is well in his personal life, I have to say I like the new cranky Kevin.

Posted by: jerry on December 12, 2007 at 2:03 PM | PERMALINK

I remember last year some on this site and others where saying the Home Market was going to be a bust and all the righties said trust the markets trust the Bush adm. all will be well.Once again the Left was correct and the right was as always wrong.

Posted by: john john on December 12, 2007 at 2:06 PM | PERMALINK

Hey SocGad,

Agreed that liberalism is not supposed to mean consumer irresponsibility. But it was corporate policy to leverage consumer irresponsibility into SIV and other make believe money makers that both encouraged and massively amplified the ill effects of irresponsibility.

But consumers, irresponsible or not, are crushed every day in our economy. Credit card practices, bankruptcy laws, health care costs, insurance cots, tax policies, you name it, are stacked against the individual. Massively. Corporations turning record profits are rewarded with subsidies, no bid contracts, lax taxes and enforcement and a total lack of accountability. They reap the profits from risky and semi-legal investment and accounting practices, then are bailed out by the tax payer to cover the asses of rich Republicans in and out of government. This is one party rule and class warfare, and should be opposed by, you got it, class warfare.

Foreclose on the companies. Evict the executives. These guys have blown more money than the GDP's of most countries. Arrest them. Seize their assets. Put them on trial. Deport them empty handed to Bahrain. When we get an accountability decade for corporations and Republican elites, we can start worrying about consumer irresponsibility. In the meantime, don't worry about it. They're already being screwed.

Liberalism means balancing liberty and equality. Republicans have been busily destroying both over the last decade. So, yeah, liberalism isn't a license to consumerist idiocy, but in the real world, now, in the US, it's about a major push back against myriad corporate malfeasance, Republican authoritarianism, and the total destruction of the social safety net and the American dream.

Liberalism should mean pushing Republicans into the sea. And a good number of Democrats too. In fact, in my administration, the New Deal for America will include the PRITS (Push Republicans into the Sea) Corps, a majorly regenerative public works program. Should help with beach erosion.

Posted by: Trypticon on December 12, 2007 at 2:13 PM | PERMALINK

Well, did you ever try to get a home loan from "some working class schmoe"?

Not since the Reaganoids put the S & L's out of business.

The money financial institutions use to make loans are from working class schmoe's savings deposits. At least they used to be, until the financial institutions bamboozled the regulators and turned debt into more debt.

Posted by: Brojo on December 12, 2007 at 2:23 PM | PERMALINK

In case it isn't obvious, that's a parody tbrosz. The original article was recently outed posting as "harry" -- a delightful tacit admission that his original handle had no credibility, only a deserved reputation as a dishonest right-wing shill -- and stomped off in a huff after his dishonest right-wing shillery was exposed once again. Poor baby.

Spot on parody, though.

Posted by: Gregory on December 12, 2007 at 2:35 PM | PERMALINK

The savings and loan debacle in the 1980’s cost the government $125 billion. About half of this went to Texas, where a lot of the savings and loans were located. It all amounted to a huge subsidy from the rest of the country to Texas to reward their financial irresponsibility.

Posted by: fafner1 on December 12, 2007 at 2:36 PM | PERMALINK
When it comes to rescuing large financial institutions run by rich people, the party line is that we need to put our emotions on hold, save the system, and not get caught up with making petty moral judgments. Moral judgments are only appropriate when it's some working class schmoe who's done something either stupid or unlucky. Understood?

So, how come the other party (in Congress, not just in the chattering spaces) doesn't show up with an alternative line, one which paints a strong contrast?

Posted by: cmdicely on December 12, 2007 at 2:42 PM | PERMALINK

Yay Kevin!!

Posted by: tomtom on December 12, 2007 at 2:44 PM | PERMALINK

On a linguistic note:

I wish to thank Atrios for the use of the term "rewarding bad behavior" instead of "moral hazard." The latter term just obfuscates and sounds insufferably high-minded, to boot.

Personally, when I think of "moral hazard," all that comes to mind is walking through a certain section of a French industrial city at night, when I was about 20.

Posted by: David in NY on December 12, 2007 at 2:46 PM | PERMALINK
The problem at this point is that the system still hasn't recovered, and the alternative, to let banks go bust, isn't very attractive either.

I'm not sure the bailout avoids its; its key component (cloaking hurting banks purchase of discount loans in anonymity to make it less unacceptable for them to do it to get capital via interbank loans) makes all banks less attractive investments except the ones in the most trouble. It rewards bads behavior and punishes good behavior, which makes it more likely that banks and decisionmakers that caused the problem will continue in the business making the same mistakes, and makes it less likely that the ones that did the right things and aren't part of the problem will succeed.

If anything, more pressure should be put on the bad banks by making debt from abusive loans easier to discharge and harder to recover without adjusting the terms. That might actually, paradoxically, make failure less likely: part of the problem is that for any individual bank, foreclosure is an attractive choice, but the mass effect of foreclosures and resultant sales is to accelerate the drop in value and exacerbate the underlying problem in the housing market, feeding back on itself. If you make foreclosure less attractive to each individual bank making decisions on its own loans, you cut the positive feedback loop. The mechanics and definitions of which loans to apply it to are tricky, of course.

Posted by: cmdicely on December 12, 2007 at 2:59 PM | PERMALINK

We survived the S & L bust, but that was engineered by the banks' representatives.

Posted by: Brojo on December 12, 2007 at 3:24 PM | PERMALINK

You gotta hand it to the fed -- instead of easing interest rates more, they came up with a way to stoke inflation without doing a damn thing to help the credit crunch.

Posted by: Disputo on December 12, 2007 at 4:25 PM | PERMALINK

No Kevin, it's actually worse than that. Some folks facing subprime foreclosure did something "stupid or unlucky," but millions of them got just plain screwed via abusive and predatory lending schemes that ran rampant for years in the subprime sector (while government regulators averted their eyes). A few years back the Center for Responsible Lending did a study and found that predatory lending practices cost subprime borrowers $9.1 billion -- and that was before the foreclosure rate started climbing. A high percentage (I don't recall the exact figures) of subprime borrowers were subject to abusive practices.

Posted by: Dick M on December 12, 2007 at 5:18 PM | PERMALINK

(while government regulators averted their eyes)

This is the key; there is a reason all these major financial scandals (cf S&L) happen during the watch of Republicans.

Posted by: Disputo on December 12, 2007 at 6:43 PM | PERMALINK

Now you know why Ron Paul wants to get rid of the Fed. All it is is a credit card for the banks and the traders to max out and then whine for a rate cut so they can get a credit extension and then max out again. Is this really sound financial policy?

Or better yet, compare the Fed to a drug dealer providing heroin to junkies.

Off with the Fed!

Posted by: Sean Scallon on December 13, 2007 at 8:07 AM | PERMALINK

My March '05 Dollar Oraclation - a repost
.
"Pete Rose & Social Security"

Employ the Pete Rose option.

Borrow a trillion or three to fund private accounts. Place half or all of these accounts in foreign stocks, currencies or bonds. The dollar careens yet lower and these account are massively rewarded. Zee problem is solved.
Of course, zee barrel of oil then becomes quoted in les stable Euros, rising to $75 a pop, read three bucks at the pump, for the greatest borrowing nation on earth.

From March 11, 2005

(Explanation! If you're so incompetent as this capitalist mad going-in-debt administration is, just place a bet against your team...Goldman Sachs did...cha ching)

Labels: just a hunch, My usual Delphic self, who's driving this bus?

Posted by: cognitorex on December 13, 2007 at 2:10 PM | PERMALINK




 

 

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