Moral hazard: Gentlemen, start your engines!

Posted by Marc Hodak on September 20, 2008 under Invisible trade-offs | Comments are off for this article

Everyone heard yesterday morning about the Federal government basically agreeing to bail out the (remaining) financial firms. Everyone got a glimpse of the breathtaking cost of this bailout to the taxpayers. We also heard concern about “moral hazard” as a secondary effect, though that concept is hard for the average person to really get, especially the idea that this secondary effect may be even more economically costly than the nominal cost of the bailout.

What slipped by with nary a peep was the news later that day that GM drew down the remaining $3.5 billion of its credit facility.

To me, this looks a lot like your second kid, seeing the promise that you made to pay off the debt of your first kid, suddenly decide to tap out his own credit.

The Bush administration knew that one of the dangers of bailing out the financial sector is that other sectors were sure to pile on. Detroit was a logical choice. Especially in an election year where Michigan is a swing state. Can Ford be far behind? And Michigan is not the only swing state this close election…