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The Dukes of Moral Hazard
I've been too busy enjoying the splendid early fall weather to comment on the new bailout law. I don't have much to provide in the way of insight now that we have officially entered a new frontier in American finance. Sure I'm fine that the U.S. Treasury is going to leverage hundreds and billions of dollars to unstick the financial system.
I like some other observers (Krugman) don't see exactly how buying the assets in question will actually work in the end. I also don't get the connection between the new found support from members of Congress and the billions of dollars of crazy tax breaks inserted into numerous sections of the final bill. Congress peoples from both ends of the political spectrum implored that doing the bailout would be an irresponsible use of taxpayer funds. Some of the staunch free market advocates in the house insisted that any government intervention would lead to that nasty old moral hazard condition. The market got us here and it would lead us out free of any socialized fixes. It's amazing what a subsidy for wooden arrow makers here and a break for race track operators there will do to bend those ideological leanings. The real travesty will of course be the lack of any tightening, no rethinking the way we regulate financial markets.
In the end the Treasury plan as passed may have an effect and start to loosen up the credit markets like a big dose of fiscal Metamucil. A quick check of the TED spread every week will verify if this is happening. That's great for the large financial firms (in college we referred to them as financial intermediaries) since they comprise the core of the financial monolith or shadow banking system.
What about all of us mortals that occupy the fiscal purgatory of the real economy? The bailout for us has yet to arrive. Unemployment is up (159,000 jobs lost last month), credit is drying up, and the rate of inflation has yet to show signs of subsiding. The fate of local governments as seen by their budget outlooks for next year is looking more grim. What will the Federal government do for them? Does our economy get an enema next? For now all we can do is hold on and hope for relief. I fear that the money for the Main Street bail out was already spent.
I like some other observers (Krugman) don't see exactly how buying the assets in question will actually work in the end. I also don't get the connection between the new found support from members of Congress and the billions of dollars of crazy tax breaks inserted into numerous sections of the final bill. Congress peoples from both ends of the political spectrum implored that doing the bailout would be an irresponsible use of taxpayer funds. Some of the staunch free market advocates in the house insisted that any government intervention would lead to that nasty old moral hazard condition. The market got us here and it would lead us out free of any socialized fixes. It's amazing what a subsidy for wooden arrow makers here and a break for race track operators there will do to bend those ideological leanings. The real travesty will of course be the lack of any tightening, no rethinking the way we regulate financial markets.
In the end the Treasury plan as passed may have an effect and start to loosen up the credit markets like a big dose of fiscal Metamucil. A quick check of the TED spread every week will verify if this is happening. That's great for the large financial firms (in college we referred to them as financial intermediaries) since they comprise the core of the financial monolith or shadow banking system.
What about all of us mortals that occupy the fiscal purgatory of the real economy? The bailout for us has yet to arrive. Unemployment is up (159,000 jobs lost last month), credit is drying up, and the rate of inflation has yet to show signs of subsiding. The fate of local governments as seen by their budget outlooks for next year is looking more grim. What will the Federal government do for them? Does our economy get an enema next? For now all we can do is hold on and hope for relief. I fear that the money for the Main Street bail out was already spent.
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