The Big Game Disaster Scenario – When The Common Man Opts In

| September 28, 2008

So it seems that the biggest boondoggle of them all is in the pipeline to become law. Crooked high dollar investors are about to be forgiven of all they owe from bad debts, with the cost transfered to the common taxpayer. This is often referred to in economic circles as a “Moral Hazard“. Wikipedia puts it this way:

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his or her car, because the negative consequences of automobile theft are (partially) borne by the insurance company.

Moral hazard is related to information asymmetry, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

Yes, that means that the big players get the cash, and you get the bill. Now if you are like most middle class Americans, you are coming off a 7 year credit fueled binge, looking at prospects of a declining economy and mounting payments from all that debt. You might think “Hey, the government is going to forgive $700 Billion in debt, how much of that is mine?”.

Ah, and this is the sad part – none of it is yours!

In a bygone age, common people might think that because they are honest hard working folks, their station in life is to toil to pay back every cent of what they owe. In today’s entitlement society, there is a strong chance that the common folks might choose to “opt in” to the $700 billion dollar ultra credit give away, a scenario that I am certain the treasury fears above all.

Middle class Americans might be forgiven if they think that if the big fish on Wall Street can walk away from debts they created by mistake, then maybe they should too. And there lies one of the weaknesses in the plan – it more or less assumes that all of the bad debt is out in the open right now. Unfortunately for them that is not the case.

The entire credit based system that has become our economy revolves around trust and the promise to repay. The Government has just publically declared that no longer applies to everyone; if you are big enough, the government will take care of it. By taking this action they have mainstreamed and normalized irresponsible behavior.

I fully expect for a large number of average folks to decide to “opt in” to this bail out program, by nominating their credit card, boat, car or house payments to be “bailed out” – simply by no longer paying. When this happens, it will become clear that $700 Billion (actually 1.2 Trillion) was not even close to enough to paper over the problem.

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Category: Credit Backlash, Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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