Thursday, September 2, 2010

The horror of moral hazard

The South Canterbury debacle is instructive…..

The really boring part is “Little old ladies and gents salivate over high interest rates, ignore the risk these signal and invest and ought to have lost their shirts like the other investors in the earlier 53 finance companies which have fallen over.” Of course that great hater of “smarmy rich pr—ks” maestro Cullen, like all politicians had to “do something”…. and he did (though Phil Goff has forgotten it – duh) and introduced the government deposit taxpayer theft guaranteed deposit insurance.

The interesting part is yet another proof of the fact that “incentives matter, all the rest is commentary” (Landsburg). Give them the guarantee and what happens – as Sandy Maier…. to his eternal credit noted – they ramped up the investment in yet more risky investments… bars in Auckland etc etc. So a highly leveraged company sees that someone else will pay and goes for the doctor. so far so predictable. Isn’t it good to have a regime which “aligns” with Australia and the U.S.?

Worse…. all other finance companies now know they have till October 2011 to call in the receivers and save their hide and their depositors funds if things look dicey. Marvellous.

So from now on its “forever Tuesday morning”. The rat has smelt the cheese and while we all bend over backwards to be nice to “trust me I’m Allan I am modest and drive a Volkswagen”, investors scurry from placing their funds where those funds might, for a measured risk, generate improved social well being.

No comments:

Post a Comment