Moral hazard, bailing out the rich and more trouble to come.

It is exasperating to hear that US regulators and policy makers have decided to bail out the principals responsible for the gross uncertainty and risk that prevails in financial markets. Hundreds of billions of dollars will be spent on buying bad debts in order to reliquify financial markets. It doesn’t sound like a smart investment does it?

Of course this bail out serves the richest best. It is the financial institutions that fabricated, marketed, sold and invested in complicated debt products, and now suffer their real value(lessness) on their balance sheets, that will receive cash for their bad debts. Money for old rope.

Who pays for this? The tax payer of course. And we all know that “the taxpayer” is dominated by the majority of people who did not benefit from the profits of financial profligacy. It includes the people who are losing their homes because they were financed on delusional valuations and incompetent due diligence.

This drama will be made more poignant for those with their eyes open to what is going on when the salaries of CEOs and financial managers are revealed in the coming months.

We might hear that the investment banks are hurting. Goldman Sachs and Morgan Stanley are seeking capital injections and restructuring their legal status to facilitate this. But they are still making loads of money. And surely, as competent analysts, fiduciaries and asset managers, they should have planned to survive volatility by investing in lower risk assets too. But they, like everyone else, were too greedy.

It is unfortunate that politics is also obscuring the issue. The virtual nationalisation of the US financial industry is completely counter to the usual mantra sung by America: competition, survival of the fittest, free market etc. The normal asset liquidation of bankrupt/insolvent businesses should be allowed to proceed – there is certainly enough money to pay for the assets – America is not poor, it is superbly rich. As we’ve said before, any support should be targeted at the bottom of the financial pyramid, at regular people and home-owners, not at the rich institutions that catalysed the mess. The approach is the opposite to what is needed.

All of this is an ominous portent. Neither regulators, administrators, industry players, media nor people have really admitted to the systemic problems that have caused this situation: a culture of dysfunctional values like greed and dishonesty that fuel moral hazard and allow inequity. Without truth in the world of money, its credibility is destroyed. There will be no long term solution and the benefits of capitalism will be lost to an even more dysfunctional system of value trading, such as barter, “socialism” or feudalism.

The rich and well educated are failing in their obligation to set an example. The stock markets might bounce today, but the pain will be exacerbated and continue for much longer.

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