• Geithner Moral Hazard

      "The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy," Treasury Secretary Timothy F. Geithner said in an interview.

      That's from today's Washington Post. The "moral hazard risk" arises when government encourages people to gamble by suggesting that government will rescue them if they fail. By bailing out the banks, the federal government  has essentially declared to the world that they will do it again. That created a moral hazard.

      It's refreshing to know that Administration is aware of the problem. But how do they plan to fight it?  By:

      ... penalizing banks for being big. It would require large institutions to hold more capital and pay higher regulatory fees, as well as allow the government to liquidate them in an orderly way if they begin to fail.

      So let me get this straight: The government has encouraged, and in some cases forced, big banks to merge and grow bigger...but they propose now to penalize the banks for becoming too big.

      On what planet does this make sense? The real way to fight moral hazard is to tell these banks that they will be allowed to fail...and then to have the courage to let them.

      Meanwhile, these special rules for "big banks" make it harder for smaller regional banks to compete:

      "To favor one class of financial institutions over another class skews the market. You don't have a free market; you have a government-favored market," [Camden Fine, president of the Independent Community Bankers of America] said. "We will never have free markets again if you have the government picking winners and losers."

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      Pre-October 2009