It’s a favored concept among economists, especially conservative ones, this notion of moral hazard. Basically, the argument is that if you are insulated from the consequences of your foolish decisions, you have no incentive to avoid them. Think of it in terms of Britney-Lindsey-Paris: if you catch an STD or seven, you can get all the drugs you need. If you drive your Jag into a pole while tanked on Grey Goose, you can go to tennis prison for a week. If you’re whacked out on grass and pills and God knows what else, there’s always a VIP suite at Betty Ford waiting for you. No matter what, you never have to land on your ass.
P.J. O’Rourke, back when he had his fastball, had the perfect term for this: “the Whiffle Life.” It came to him after he spent a night with the DC police at the height of the crack epidemic when they raided and busted a teenaged drug dealer at his roach-infested house, came home the next day, and found out one of his friends had a kid on drugs and was trying to get the kid on the “treatment track” rather than the “punishment track.” (An aside: everyone, and I mean EVERYONE, should read “A Parliament of Whores,” PJ’s landmark book about the American system of government – from the 3 branches to implementation issues to the ultimate responsibility in a democracy. I would have used it as the textbook for PSCI 101 if I’d stayed in my old profession.)
So anyway, a bunch of stock traders get wacky on the junk and start pouring money into crazy financial instruments built on unsound lending practices and borderline-deranged notions of investment, and as a result, they wind up holding the bag when the whole house of cards comes crashing down. Their investors are baying for blood, the value of the company is in freefall, and guess how big a splat it makes? None. Because at the last second, Uncle Sam is there to throw a $30 billion mattress under them.
Now everyone will go on and on about how it had to be done, you can’t let a major financial institution collapse, the economy is in a precarious state, blah blah blah. I’m not having it. Lassiez-faire capitalism, market economy at its purest, relies at heart on the immortal words of the late Dr. Hunter S. Thompson:
Buy the ticket, take the ride.
If you loaded your investors’ money into securitized subprime mortgages and suddenly found yourself staring at a billion-dollar shortfall, whose fault is that? Nobody is obligated to save your ass. Now that you’ve climbed up there, it’s a hell of a lot higher than you thought, ain’t it? But not if Uncle Sugar is waiting with the parachute, because even if we have to cut interest rates five times and kindle the kind of inflationary pressure that hasn’t been seen since Jerry Ford and Jimmy Carter were asking “what’s your 20, good buddy?”, we’re not going to let you hit the ground, because you’re a vital part of the American economy and must be preserved. It’s not like you were a bad person or anything – you’re too white and too rich for that.
That’s what we’ve come to in our society. There is a threshold line, which I shall call…the Whiffle Line. Above that line you get to live the Whiffle Life. You are completely free from the consequences of your actions. Somebody is always there to bail you out, and you can go on your way just as you always have without ever having to change a thing.
But God help your ass if you’re not above the line.
It’s a tough call. You don’t want to reward bad investments or business decisions made by the banks (including the one for which I work), however you hate to see the situation cascade so far that it takes out more innocent people as well. For that reason, I think I like the work the feds did behind the scenes with Bear Sterns. By stopping the run on the bank and then assisting JP Morgan Chase with buying them out for almost nothing ($2 per share). Heck, their Manhattan HQ is worth about $8 a share.
So essentially Bear Sterns, and by extension their investors, don’t get rewarded, but the company isn’t allowed to fail completely and impact more-or-less innocent bystanders.
The potential big winner is JP Morgan Chase who get the bargain, however they are also taking on the risk that the Bear Sterns portfolio is even worse than anyone realizes to this point, so I don’t mind rewarding the risk taking, in this case.