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Comment by s_q_b | Hacker News Reader

In the aftermath of the financial crisis, we frequently heard the term moral hazard.

The reason why bailout money couldn't be used to restructure underlying mortgage debt directly, we were told, is that individual consumers would see it as license to take on risky housing debt, believing that the government would bail them out again in the future.

Unfortunately, that's exactly what happened, with one small difference. Because it was the banks that were recapitalized, the largest banks are actually incentivized to make risky bets, seeking higher returns.

The bailout now constitutes an implicit government guarantee.

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> The bailout now constitutes an implicit government guarantee.

The bailout continues, but through monetary policy. The prolonged low rate environment is the biggest robbery of the century. Savers are being robbed from their savings to subsidize over-borrowed house owners. And I think it is fair to talk about a moral hazard. I know bankers (disclaimer: I am a banker too) who deliberately over borrow personally because they think the central banks will always be there to save their ass through low rates, pumping liquidity to push prices up, etc.

I haven't had a savings account since the 80s. It's a rotten deal, I don't know why anyone would.

What do you with your money? I assume you have some to spare...

There's plenty of places to put money that's not in a savings account. Personally, I only keep a couple of months living money in savings and have everything else in one of Vanguard's funds. Pretty darn diverse with far better returns than any savings account and whatever proportion of risk that suits you. Hell, you can even get exposure to the housing market through property securities if you want some of the bubble for yourself.

Stocks. Mostly index funds.

If you are in the US you probably have a pension fund.

To be more explicit, it isn't a guarantee as much as an implicit government economic policy which, it seems, boils down to:

It is the individual's responsibility for their own financial security, and the larger economic scheme of the United States should continue to support and encourage profiting off of moral hazards.

That said, there does seem to be some US consumer backlash, where individuals are basically attempting to stay out of this system altogether. Millennial house buying rates say it all: these rules are unfair, and the next generation don't want to play.

Or can't pay...

It's certainly a mixture of the two.

kinda. the shareholders for many of these banks lost everything or close to everything, and the govt . took large stakes. It was not a shareholder bailout - rather it wa a capital infusion. We're moving closer to nationalization of parts of the fin. system

Then it was a bondholder bailout. Many bondholders should have lost a lot but came away mostly unscarred..

Above all it was a managerial bailout. The people who made the actual decisions that led to the crisis made it out fine, as long as their company was lucky enough to be bailed out.

and the entire planet is better for it. any idea how much worse things would have gotten if regulators (bernanke, paulson) hadn't drawn a line in the sand somewhere? those guys are heroes; they go down as the best treasury secretary and fed chair in history.

The guys that didn't see the financial crisis right in front of them?

Far worse than that: Bernanke publicly proclaimed over and over for years that there was nothing to worry about. Almost right up to the point of collapse, he was saying that the risk of a bad recession or large housing implosion were very low.

The "systemically important financial institutions" have been subject to harsher capital requirements, more intrusive regulation. In theory, they're supposed to have plans for orderly shutdowns in case of major failure, but the effectiveness of these can't be tested without another major crisis. It's sufficiently onerous that some of these institutions (e.g., GE Capital) are slimming or shutting down entirely to avoid the requirements.

Is this enough to make them cease to be TBTF? I don't think anyone knows. But the largest banks have generally been less risky, not more risky over the past half-decade.

I understand the moral and philosophical argument made here, and as a liberal, I am predisposed to believing it. However, the article claims that due to capital requirements at least the banks have reduced their place in riskier trades. So even if moral hazard didn't disincentivize risky trades, clearly capital requirements have, so at least something has worked?

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