Friday, April 3, 2009

Obama and Geithner's Ultra-Bullshit:
Moral Hazard

Moral Hazard can be defined as "the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk."

Here's Joshua Holland on Geithner's less than brilliant plan:


Recall the Geithner Bank Plan in a nutshell: private investors would buy those "toxic" assets off of struggling "zombie banks." The buyers would put about 7 percent of the purchase price down, and the Treasury Department would match that with another 7 or so percent. Then the FDIC would offer government-backed loans for the remainder.

If the assets were to recover their value and turn a profit down the road, the investors would split the profits with the government. But if they don't -- if their values continue to tank -- then you and I and everyone else who pays taxes will be on the hook for the lion's share of the losses.

In other words, we're limiting bargain-hunters' downside risk if they buy the banks' crap and it doesn't turn out well for them. It's a pretty sweet deal for those investors. And, as I wrote when Geithner first announced it, pretty much the definition of "moral hazard."


And the countdown to nationalization continues...