Financial Crisis and Moral Hazard
Lance Paddock, in his best Mr. Rogers imitation, asks, “Can you say moral hazard?”
Unfortunately, the notion of “too big to fail” means that those who behave badly often keep the benefits when things go well but pass off the negative consequences of failure.
Absent from Paulson’s plan is any protection for taxpayers. They’ll fund the downside if losses mount at the two mortgage giants. But if Fannie and Freddie recover, stockholders and management gain. Call it “casino capitalism” – taxpayers bankrolling management high rollers.
The plan doesn’t ask stockholders or management to suffer for their financial indiscretions. The players who put their companies in jeopardy get to stay in charge – Paulson says he isn’t looking for “scapegoats.” Someone should remind him that capitalism without failure is like religion without sin.