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Tuesday, November 25, 2008

Ever wonder where bitter apples come from?

With bailout mania sweeping the nation, there is a small warning in an article in, of all places, the New York Times. The problem is that this is a warning that has been repeated and ignored many more times than it's been stated. There is a concept in insurance and societal behavior called "Insuring the moral hazard". The concept is that if someone or any entity is shielded from the full consequences of their behavior that that behavior becomes more likely to occur the further the behavior is separated from it's consequences. This is explained in the greed/fear scenario. If there is a payoff to some behavior, that payoff is moderated by the fear of consequences arising out of that behavior. If fear of the consequences is reduced, the probability of that behavior occurring rises. A prime example of this is in the Fannie Mae/Freddie Mac disaster: As FM/FM "encouraged" lenders to make riskier and riskier loans, the banks and mortgage originators saw that as long as FM/FM was buying those risky mortgages. That and the implied belief that FM/FM were government entities and the Feds would back up any problem loans, the loan originators were "insured" against loss. Enter in Wall Street. They saw a way to create security backed assets with these mortgages. And again, as FM/FM were government created entities, Wall Street saw that these were fairly risk free assets (or at the minimum reduced risk) guaranteed by the federal gov't (aka you and me). Well, AIG looked to insure those assets. When the bottom fell out of the mortgage bubble, it was a house of cards/line of dominoes that fell. Again, all thanks to government intervention, coercion, threat, duplicity and outright fraud.
So, here, in the New York Times we have this bit of wisdom:"
But longer term, the new bailout could haunt regulators and taxpayers. The move ultimately may encourage banks to take more risks in the belief that the government will step in if they run into trouble. " Geez! Do ya think?? What the crap do these people think started this whole bailout disaster to begin with? When the loan originators saw reduced risk as did all subsequent financial entities, well, disaster was in the offing.
So, we have more bitter fruit with the promise of another crop from the same tree firmly rooted in bad government policy.
Eat hearty fellow citizens!
BTW, ever hear of the green apple quick step?
We'll yearn for the days when things were only that bad.


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