Wednesday, July 9, 2008

Evidence of Moral Hazard from Bank Bailouts

"The bailout of Bear Stearns Cos. arranged by the Federal Reserve in March shows the government won't allow the companies to fail, Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina."

Recent action, like the Fed bailout of Bear Stearns, and currently the "Hope for Homeowners Act" are creating an environment that insulates investors from risky behavior.  By preventing them from facing the consequences of their investments they are more likely to take riskier bets.  This moral hazard threatens to harm the economy and worsen a decline.

Congress must not pass the "Hope for Homeowners Act" (section 257 of H.R. 3221) By backing these loans with GNMA it is  a 300 billion dollar bailout for banks, just like the $29 Billion dollar Bear Stearns/ JPMorgan Chase bailout facilitated by the Fed.

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