Monday, March 23, 2009

Moral Hazard

We were looking for an interesting article to link in relation to the concept of "moral hazard" and the current Fed policy towards financial institutions when we came across these two lines sum things up perfectly:

"A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Essentially, profit is privatized while risk is socialized. Taxpayers, depositors, and other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions."

To put it in trading terms: it's like taking on a very risky trade that might give you a home-run profit but entails high risk, all on your Daddy's Schwab account. If it turns out well, great and Daddy lets you keep all the profits! If it doesn't, well, Daddy just absorbs the losses and resets the account!

Sunday, March 22, 2009

Calvin and Hobbes predicted our bail-out nation predicament 15 years ago:

(H/T Jeff E.)