Perhaps the most egregious consequence of the Mother of All Bailouts (MOAB) is the moral hazard generated on Wall Street. After all, if you make poor investment decisions, now there will be NO consequences as the government will swoop in and take your risk away. Of course, you can keep all the profits in the meantime. Now, you can only do this if you are Too Big To Fail (TBTF); little guys like Lehman Brothers don’t qualify. And don’t even start with regular borrowers who got in over their heads. I’m sure they’ve got to be taught a lesson. Or something.
Now let’s imagine if we ran our households the way our government manages our economy. And I’m not talking about finances here. I’m talking about parenting.
Here’s a situation that arose a few weeks ago: Call it Elrod’s Bad Parenting 101.
My oldest son LOVES trains. And he really loves to watch train videos. To most people, videos of freight trains passing through Nebraska cornfields or Appalachian mountain tunnels would be the perfect sleep agent. But for my sons – ages 6 and 4 – these videos are as thrilling as Christmas morning. And many of these train videos are on YouTube, often with fancy editing and soundtracks.
Anyway, my oldest son (a few weeks ago) was watching a YouTube train video when we called him in for supper. “OK, let me just finish this video. It’s only 45 more seconds and I’ll be right there.” Having hedged our supper time schedule, we said he could finish. Three minutes later, he was still at the computer. “Where are you? The video was only 45 seconds!” Hushed response. Then, I go to the computer and notice that he’s now watching a NEW video that’s 7 minutes long.
“That’s it. We’re turning the computer off and you’re coming to dinner now! And you’re not watching any videos after dinner. You lied to us and said you’d come after your video was over” Tears. BIG tears. Screaming and facial contortions. You can’t take my train movie away!!!
“Come to the dinner table now and sit down.” He doesn’t come. More screaming. Now the neighbors can hear it through the walls. He finally comes in, eats two bites and goes back to crying and screaming about how we CAN’T take his train videos away after dinner.
It goes on like this for an hour. Moping, whining, crying, screaming. And then I relent. I just want him to be quiet. It’s getting close to bed-time and I know he’ll never go to sleep like this. “OK. You can watch just ONE short video before bed.”
Pure glee on his face. He’s gotten a new lease on life. He watches the video, dutifully brushes his teeth, reads his book and goes to bed. All is well. I feel a little guilty for caving in, but at least my headache from hearing him whine is going away.
I forget about the incident. But my son does not. Three days later it comes up again. Almost the same scenario. But then he mutters something unbelievable, “Why are you saying I can’t watch my train video when you’re just going to change your mind anyway.”
OH MY GOD! He just called Mom and Dad out. We vow to ourselves that this requires serious consequences. We not only take his videos away but take them away for the rest of the week and tell him that we are not going to change our minds based on his crying. He actually gets it and realizes that his cynicism got him in trouble. But neither of us parents feel like he’s learned much of a lesson here.
This, folks, is moral hazard. When you spell out consequences for poor behavior and fail to follow through on them, you encourage even more cynicism. You lose credibility.
And that’s what’s happening on Wall Street. Look at the giddiness of Wall Street after hearing of a plan to bail them out of all their bad decisions. It’s just like my son that evening after I gave in and allowed him to watch his video. And it WILL come back to bite us all.
The real lesson on Wall Street is this: consolidate yourself with as many other entities as you can so you can become Too Big To Fail. And then make the most reckless investment decisions you want, because the government will come in and save you when things go bad. You’ll even keep your golden parachute.
Of course, if regular borrowers and homeowners tried this, they’d be foreclosed upon with a lecture about financial irresponsibility. Moral hazard applies to Wall Street. But not to individual people. Sorry. My 6-year old son would understand.