What Happens When The Nanny State Becomes The Loan-Cosigner State?

Today we learn a new word.  Moral-hazard. Well really it’s two words but don’t get distracted.  Listen up!  You already owe the nanny-state about $200K, and you ain’t got no co-signer.

The term, “moral hazard”, is an insurance term.  It works like this.  Suppose every time someone asks you to borrow ten bucks you say, “sure, no prob”.  You’d be broke all the time, sure, but hey, let’s face it, you’d never have a shortage of friends, right?

Then a couple of patsies come along willing to insure your loans cheap!  Their names are Fred and Fan; but that’s not important right now.  They make a deal with you.  They sell you a policy on your loans that pays you $20  if one of your friends defaults on a $10 loan.  Who could pass on a deal like that?  You only go around once in this life, right?  Why not do it with gusto… or something like that.

In the insurance business, deals like this are appropriately known as moral hazards.  It entices me, the insured, to be careless, even unethical maybe, because I will actually be better off if my friends don’t pay me back.  Insurance companies who must meet payroll and pay the rent shy away from such foolishness.  But there are some insurance companies that don’t have to worry about such pesky problems because they have their own patsies.  That would be you, the tax payer.

So, if you’ve ever wondered how bankers could loan out money to anyone who could fog a mirror and still be around today to pour money into leftist political campaigns, now you know.  They really never were in jeopardy of losing the money they loaned.  You were.  And that, for those making bad loans, was no prob.

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6 Comments

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6 responses to “What Happens When The Nanny State Becomes The Loan-Cosigner State?

  1. Wow, isn’t it amazing that this is the way the government works?

  2. Hey, I liked the moral hazard thing. Of course, wouldn’t happen in our world since people are basically good, but a nice idea.

    So, are you going to give us some insight on this “fiscal cliff” we’re heading toward? Because I, for one, am completely baffled.

  3. I agree; the same thing happened here. The taxpayer has been saddled with the bad debt of private institutions, after an initial bank bailout to stop a run on the banks went much further than it should have. We still don’t even know the extent of some of the debt – more keeps popping out of the woodwork. The way capitalism is supposed to work is that more risk = more reward. Other countries have forced their bond-holders to share some of the burden, but not us – we’re too darn nice.

    • For my own education would it be possible to explain briefly that last sentence? Or provide a link?

      • Bondholders are the creditors of the banks – other European banks and individuals who lent money to Ireland’s banks during the boom years. Make no mistake, these are the people who are being bailed out in all these big EU bailouts you keep hearing about, not the country’s citizens. This is because the government has committed itself (ie us, the taxpayer) to repaying this unsecured debt, and they’re borrowing money from the EU to do it – throwing good money after bad.

        David McWilliams is a good source for the goings-on in European economics. This article from about a year ago relates specifically to the bondholders, but it’s worth checking out his other work, especially the “Punk Economics” video series. He was one of the very few people who, way back in 2003, saw the property boom for what it was – a dangerous debt trap. You may not like some of his conclusions – he does trash the standard right wing mantra that the economic crisis in Europe was caused by free-spending governments, a point I’ve raised on Neil’s blog in the past. That is true in some cases (Greece) but is certainly not true of Ireland or Spain – in fact Spain stuck to the EU’s fiscal requirements better than Germany did leading up to the crisis. And even with Greece, you have to ask yourself; did the Greek national character suddenly change overnight? Or were the people lending them money perhaps a bit reckless and should shoulder some of the burden?

        A country that got it right is Iceland, they let their banks fail, ie let the free market take its course.

        Sorry to go off in preacher mode, but I’ve been following all this quite closely for a while.

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