Lien: "The Moral Hazard Economy"

A lot has already been said about the crisis in the American economy and also about how the situation is turning in the right direction thanks to, amongst other things, the help of the American government. This week, I read an article in “Harvard Business Magazine” that raises some very good questions about this. A lot of money has been poured in the economy by the government, but what will it look like after the crisis? Will the government be able to get out of its debts? Will the economic actors be aware of risks or will they become moral hazards?

After the huge collapse of the world’s economies in the fall of 2008, the U.S.-government, along with many other governments around the world, has poured huge amounts of money, taxpayers’ money, in large financial institutions, companies, etc., but the big question that opposes itself now is the fact whether in the future, the economic actors will abdicate from doing risky business or will the large bailouts have given them the idea that risks are okay, because when things go bad, the government is there any way to save them?

Another effect of the huge bailouts will be that, because of the recession, the government’s revenues aren’t that high, but the expenses on the other hand will only get bigger, not only in terms of the crisis, but also the regular expenses, when being a government, have to be dealt with. There is a lot of doubt on where the money will come from. Most likely, the government will do this by selling Treasury paper, but will there be enough buyers? In the past, the US government was mostly depended of foreign investors to buy these papers, but their interest is also questioned seeing the economic situation. If they don’t buy, money lend by the government could become very expensive as the government will be in search of a lot of money.

In the article, they also mention the transformation of the Federal Reserve System as a consequence of the government’s bailouts. Because of its input in the “financial rescue” these last few months, the Federal Reserve System is being seen as ‘the solution of the banking crisis’, putting the System’s normal function in question.

I found this article to be very interesting, because there had already been a lot of writing about the crisis and the government’s support to get out of the crisis, but this is the first article I read that really wonders about how the economy will look like after the crisis. Now the government is acting almost like a ‘superhero’ that will save all banks and companies, but few questions arise about their ‘corporate finance’. Will they still be able to get out of their debts? The financial situation of most governments isn’t very good at the moment.

Another thing that is really suitable in our corporate finance – blog is the question about whether in the future companies, etc will be more into risk or will they have learned a lesson now. This can be related to ‘financial risk management’. Maybe it will be like they say in the article. Maybe economic actors will take more risks in financing their business, because, the government will help when it all falls down. This being said, I find this a very sad preview of how the future may look like. When doing business, people used to want to have a healthy business. When this will be the new spirit, things good turnout bad, because I don’t believe for a minute that the government will be able to counter these kinds of debts again in the future.

Lien Vanneder

Source: http://hbr.harvardbusiness.org/2009/07/the-moral-hazard-economy/ar/1