Moral Hazard

One of the arguments against bailing out the banks, or of creating an insurance fund or levy to do so if needed in the future, is that of moral hazard. By promising to do so if needed in the future we make the necessity of doing so greater for it\’s a heads I win tails you lose argument for the banks themselves.

The strongest proponents of this view are (apart from the Austrians nobly waving the flag for proper free markets over there in the corner) those on the left.

One of the arguments against bailing out Greece is exactly the same one. Having spent several decades splurging the money around like a drunken sailor ashore at Piraeus, if we bail them out then we make future bailouts more likely. For we\’ve removed one of the constraints against governments being so damn stupid in the future.

Absolutely none of those on the left who make this argument about the banks also make this argument about Greece.

Why not?

12 thoughts on “Moral Hazard”

  1. One obvious reason is that any Greek bailout has been discussed with fears of moral hazard at the top – this is after all the position of most of the EU governments and our own (left-wing) government.

    I find it a little bit of a manufactured post, this one – were the left that concerned about moral hazard over the bank bailout (and of course you can be concerned about it and still ignore it), were the right that unconcerned, and vice versa on a Greek bailout?

  2. What Ian Bennet says.

    Greece is operating the Statist/Socialist model and to bail it out is to implicitly suggest that it was not Greece’s fault, not a flaw in the economic paradigm. This lie must be maintained at all costs

  3. Because money spent by governments is noble and pure and does nothing but good, whereas money spent by private individuals and companies is greedy and evil and causes everything bad in society. Don’t you know that?

  4. What is it you always say about incentives?

    If the incentive for good behaviour is avoiding a hearty kick to the goolies, the removal of that threat will obviously increase the number of people behaving badly.

  5. I really am not aware of “the left” objecting to an “insurance fund or levy” to fund future bailouts (and, perhaps more importantly, to raise the price of accumulating risk). I thought the left liked that idea (you could call it a “tax on banks” then the left would definitely like it, right?)

    And I was also not aware that objections to the bailouts per se were much more prevalent on the left than on the right; I’ve encountered lots of right wingers who thought they should have been allowed to go bust.

    The left has its share of ignorant fools, just like the right, but if you care to look at sensible left wingers, I think you’d find the bank bailouts were supported, if reluctantly.

    Tim adds: Richard Murphy is against the insurance funds, Richard Murphy is, if we believe Richard Murphy, one of the leading intellectual lights of the left therefore…..

  6. Holy Cow! please do not equate RM with “the left”

    (although I acknowledge he’s taken far too seriously by the left, esp. The Guardian, home of willful ignorance about all things economic).

  7. Well yes, but for example, I didn’t know this: “The commercial banks in the zone are able to buy government bonds, which “paid” 3-6% long term interest rates (for all the sovereign bonds of members) over the last decade, and then deposit them at the ECB. They could then borrow from the ECB at the ECB financing rate, which today is 1%, against this collateral so pocketing a profit — and then buy more sovereign bonds with the funds”

  8. Greece’s problem was was fiscal, but the underlying cause was its joining a monetary union with countries in at different levels of development. They have to stick with the Euro and this is a big problem.

    The alternative is to do a Bulgaria, where the government runs a balanced budget after a house price crash (which had sustained the economy for the 00’s) and the result is total misery, huge unemployment and real wage stagnation.

  9. As for the moral hazard, it has been talked about.

    I guess the difference with the banks is that Greece will get conditionalities imposed after a bailout to make sure this doesn’t happen again, while the extent and even prospect of financial reform is far from certain.

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