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"with all the long-term adverse implications for moral hazard"
The proposed bail-out of Fannie Mae and Freddie Mac entails the socialisation of risk
– with all the long-term adverse implications for moral hazard –
from an administration supposedly committed to free-market principles.
Joseph Stiglitz, Financial Times July 24 2008
The writer, 2001 recipient of the Nobel Prize for economics, is university professor at Columbia University.
Much has been made in recent years of private/public partnerships. The US government is about to embark on another example of such a partnership, in which the private sector takes the profits and the public sector bears the risk.
Defenders of the bail-out argue that these institutions are too big to be allowed to fail.
If that is the case, the government had a responsibility to regulate them so that they would not fail.
No insurance company would provide fire insurance without demanding adequate sprinklers; none would leave it to “self-regulation”.
But that is what we have done with the financial system.
Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.
All of these principles were violated in the Bear Stearns bail-out. Shareholders walked away with more than $1bn, while taxpayers still do not know the size of the risks they bear.
Something has to be done; on that everyone is agreed.
We should begin with the core of the problem, the fact that millions of Americans were made loans beyond their ability to pay.
We need to help them stay in their homes, including by converting the home mortgage deduction into a cashable tax credit and creating a homeowners’ Chapter 11, an expedited way to restructure their liabilities.
A basic law of economics holds that there is no such thing as a free lunch.
Those in the financial market have had a sumptuous /extremely costly, rich, luxurious, or magnificent/ feast and the administration is now asking the taxpayer to pick up a part of the tab.
We should simply say No.