Politicians, Treasury Secretaries, etc. would have you believe that “moral hazard” is something we should only worry about in the abstract, in the future, when they’ve moved on to another job. But now a study [16] confirms with hard facts: moral hazard–it lives.
Researchers have asked for some time whether and how bailouts might affect banks’ risk-taking. Would they run wild, aware of the high likelihood of being bailed out again if they ran into trouble? Or would they ease off precisely because they’d now be assured of lower financing costs and long-term survival, and therefore would want to avoid doing anything that might cause regulators to take that valuable banking license away? More daring or more discipline?
Each of these camps had its underpinnings yet the question was a difficult one to study. Why? Because, generally speaking, the developed Western countries didn’t really do bank bail-outs. [Insert smirk here.]
But then came 2008 and its bailout-palooza. And so, thanks to hundreds of billions of taxpayer dollars and an alphabet-soup of bank welfare programs, this question can now benefit from the availability of real-life, empirical data. (Cloud, silver lining and all that.)
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Anyone who thought otherwise is moronic. Now banks have an ultimate backstop. Be it our gov't, the eurozone, or china(who is doing the same with their banks). All this creates is a sense that risk doesn't matter. Failure doesn't matter. Because there will always be that backstop. Now, had we done the right thing, and allowed bank failures, the market would have corrected itself. The losers would've lost. Instead, they got another chance.
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