Recently a friend of mine told me that – “he didn’t care what they (government) did, they should just fix it (the economy)”.
I was amazed at his conviction that “they” could fix “it”.
When I was in school – one of the dominant right wing political parties in India was trying to alter History textbooks to show a certain historic incident in positive light.
That became a huge controversy and I was really peeved at the – Historians for not telling “History”, as it is. It is much later that I realized that there is no History, as it is. It is the reconstruction of past events and is full of human biases.
I am fairly certain that my friend too will someday realize that no one has any certain answers to fix the economy, only opinions; but that will take time.
They Should Fix It
The real import of this statement hit home much later in the day.Â My friend viewed the recession as a problem created by someone else and which needed to be solved by someone else.
I am fairly certain that all the bailout packages – whether banks or homeowners, have at least one side effect for sure, and that is – Moral Hazard.
Moral Hazard is when someone knows that they will be safeguarded from a certain risk, and therefore they alter their behavior.
For example, If homeowners know that the government will bail them out if home prices fall, they will take on more risk than they would have otherwise taken.
Similarly, banks who know that they are “too big to fail” will take more risks than they can handle, because they know that if something goes wrong the government will have to bail them out.
When the CEOs of the car companies first asked to be bailed out, they basically said – bail us out or the whole industry will collapse.
I am fairly certain that no one took the taxpayers hostage in such a way at any time other than the current recession. It is creating a – Moral Hazard so big that it may end up pervading the consciousness of a whole generation, who may learn that it is okay to make mistakes as long as every one else makes the same mistakes.
That can’t be the foundation of a healthy society, but some would argue that – hey, you need the bailouts to have any form of society to start with.
Will We Remember?
I think that despite the good intentions and nobility of all involved, the current approach is going to fail. The question is how many people will remember that the current approach failed when the next recession comes up?
The housing bubble was not the first bubble and it certainly is not the last bust. Something tells me we will not learn from this chapter of history, but then I guess that is just how humans are wired and there is nothing we can do about it.