Friday, February 20, 2009

Moral Hazard: Brother's Keeper? What happens if we nationalize banks? Put on those sticky stress test pads


Well, we’re all hearing about “moral hazard” now. Rick Santelli went on a rant (video here) “the president is encouraging bad behavior. Do you want to pay your neighbor’s mortgage”?

Am I my brother’s keeper? The New Testament says so, and a lot of religious morality (in any faith) deals with “rules” or values that deal with problems that are beyond the control of the individual in the normal sense of things.

The obvious application with Obama’s housing rescue plan is, if your neighbor forecloses, your own house goes down in value. That’s true. And it’s too bad if your neighbor took on debt in a way that you personally think is reckless, even if it was legal and encouraged by Wall Street.

Yup, 92% of American mortgages are performing properly, and its amazing that the 8% that don’t could take down an entire financial system.

Except that it is more complicated. Overseas, we see a similar pattern, especially in Britain and Spain. But what’s worse is that in many other ways, American consumers were living beyond their means, depending on slave labor overseas.

Rather than help Americans (and Western countries) build more robust infrastructures, Wall Street went on a binge, rewarding traders and salesmen for short-term gains of selling unsound instruments, and then Wall Street securitized and pretended to “insure” them. Until the money ran out.

One comment on my review (Feb. 12, 2009) on the TV blog of CNBC’s movie “House of Cards” explains it this way: “Mortgage originators took advantage of the troubles at Fannie & Freddie to start looking for entities that were willing to buy and securitize the loans that Fannie/Freddie wouldn't touch--in other words, Wall Street. Wall Street apparently was willing to buy subprime loans with no questions asked because they made them so much money.” No, Suze Orman wouldn’t approve of this behavior.

It’s getting really scary today for banks. According to CNBC, Ben Bernanke has already hinted at bank nationalization by speaking in contraposition. Look here (“Bernanke's Slip May Have Caused Bank Share Tumble”)

Then today there is “Coming Attraction: Bank Nationalization?” here with, again, a contrapositional denial, with bank executives claiming they have been reassured this would not happen.

Still, the electrocardiographic stress tests on banks have yet to be administered, and it looks like some "executive" chests are going to get shaved for all the Holter monitoring that will follow. It is sounding like several trillion more dollars of junk is going to show up, more or less like finding half of the heart muscle gone.

There are at least questions down the run about sacrosanct assumptions and promises, about FDIC insurance, pension guaranty insurance (what happens to pensions of nationalize banks – does PGBC take them over – does somebody know??). An individualistic society assumes that individually responsible decisions will be rewarded and the culprits punished. But we all live subsidized lives, and the whole idea of “personal responsibility” and “personal sovereignty” or autonomy seems at risk if the whole money system itself is. I’m wondering what we can count on.

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