Saturday, October 29, 2011

Moral hazard

Paul Krugman makes a valid point in this NYT article. Businesses need to be allowed to fail, that's part of the game. Just because an organisation is in the business of banking is no reason for it to be salvaged by tax payers. Imposing these salvage costs on taxpayers, while cutting back on their payouts in the name of austerity just makes voters paint all banks and bankers as evil Shylocks. Bailouts are bad news for a few reasons, (a) laying the seeds of future failures, bankers under stress to raise their returns will likely take on riskier bets knowing that a bailout option exists if things go bad (b) where's my incentive to be cautious and prudent (means earning lesser returns than the gamblers) during the booms if the guys who make mistakes don't get wiped out in the fall.

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