Today, Im going to take a look at the issue of “moral hazard” and how it pertains to the current economic crisis. Of particular importance is the issue of whether or not government guarantees encourage private investors to take excessive risks which might inturn increase the chance of future crises. With profit privatized and risk […]
Today, Im going to take a look at the issue of “moral hazard” and how it pertains to the current economic crisis. Of particular importance is the issue of whether or not government guarantees encourage private investors to take excessive risks which might inturn increase the chance of future crises. With profit privatized and risk socialized, is it any wonder that investors are willing to take on more and more risk in search of higher returns?
While resisting the temptation to look back to the origins of this crisis, I prefer to look forward to wonder if we are laying the foundation for future moral hazard (while at the very same time attempting to regulate away the risks of future crises).
If I had one request for our leaders to consider during the G20 conference underway in London, it would be to concentrate on fixing the crisis of today, and spend less time talking about potential regulations intended to help us avoid doing the same crisis again in the future.
On one hand, its good to reflect back and try to assess what went wrong, and to figure out how we got into this mess. But, enacting regulation to avert the same disaster in the future runs the risk of erecting barriers to recovery today.
A hotly debated topic these days is in regards to the proper role of government in stimulating the economy. The worry on one side is that without government spending, the economy would fall into a deep recession. The worry on the other side is that government would become overbearing and crowd-out private enterprise. In my opinion, both arguments are compelling, and probably each are ½ right.
To defend the position of increased government spending, I previously argued that if private investors only wanted to give their money to the government (by pouring money into Treasuries, and shunning all forms of risky investments), then the government had a responsibility to recycle those funds and reinvest them back in the private sector. I also argued (here) that if the credit markets were frozen and if the financial system was broken (as it was), then traditional monetary policy wouldn’t work, leaving only the only tools of fiscal policy to shock the economy out of a crisis.
This morning, I watched congress grilling US banking exec’s about the need to get money flowing again. Watching this session run in circles, it reminded me of a simple song my mother used to sing about a “hole in a bucket”, and the cascading flow of suggested fixes, with each leading to another, but none of them fixing the original problem (see song here)
The trouble with borrowing money to pay for stimulus is that interest rates rise, which is exactly the opposite of what the government wanted in the first place (to get credit markets functioning again). In this blog post, we will look a how there is a limit to the amount of stimulus that will be effective, because after some point…the additional cost of borrowing will push rates back up
If someone tells you that “Asian countries artificially keep their currencies undervalued” (in order to boost exports to the US), you should probably challenge them… While that assertion might have been true in 2008, it may not be anymore.
All that you think you “know” about Asian currencies may be changing…
If you were like me, you probably assumed that Asian currencies were undervalued (vs the dollar) and should rise (if only their central bankers would stop targeting a weak currency vs. the dollar). But, is that still true? Or, have the facts changed?…
In 2008, my best estimate is that China bought $374.6 billion of the $1684.8 billion increase in the outstanding stock of marketable Treasuries not held by the Fed.
China currently has — in my judgment — about $900 billion of Treasuries.