Moral Hazard

[ewx]

[Poll #1057683]

(FTAOD I'm not saying that the two situations are identical apart from the scale - I'd hoped 'actually' and 'potentially' would indicate that, if a hint was actually needed.)

Comments

[pjc50.livejournal.com]

What exactly was their mistake(s)?

I'm not sure that "responsible/irresponsible" is a nice clean cut boolean as you're making out.

What was the great non-bailout from which the current credibility of the British regulatory system stems?

My answer is influenced by the facts that (a) the US is experiencing the subprime shakeout and (b) there's a housing bubble; it's a potentially unstable situation and people are jumpy.

[beingjdc.livejournal.com]

Their mistake was to lend out three times as much money as they had in customer deposits, and charge unsustainably low interest rates to the people doing the borrowing. It is clear that if you lend someone money for 25 years, at a rate which is fixed for 2 years, and you yourself borrow that money for only three months, you need to think carefully about what happens if the price of borrowing that money for three months rises above the rate at which you have lent it out for 2/25 years. They did not.

What was the great non-bailout from which the current credibility of the British regulatory system stems?

BCCI, Barings, Equitable Life, Lloyd's of London. Central Bank Independence in general.

Happy to replace 'responsible' and 'irresponsible' with 'low-risk' and 'high-risk'. What we seem to have done now however is even more generous than what we did for Slater Walker, Ansbacher and Keyser Ullman in 1974, when the state was far more widely believed to be the answer to any available problem...

My answer is influenced by the facts that (a) the US is experiencing the subprime shakeout and (b) there's a housing bubble; it's a potentially unstable situation and people are jumpy.

It's not potentially unstable, it's necessarily unstable. That's the thing with bubbles. You can burst it now, and it will hurt quite a bit, or you can keep on blowing until it bursts of its own accord, and it will hurt like all hell.