The hazards of discussing moral hazard?

NY Times: How Bailout Backlash and Moral Hazard Outrage Could Endanger the Economy

The excerpt below from a recent piece by Neil Irwin writing for the New York Times about sums up the “economics vs. values” equation we like to talk about on this blog (and perhaps also the popular political-partisan sentiments of the times we live in…)

“My conservative friends don’t think states and cities deserve help,” said Tony Fratto, who worked in the George W. Bush White House and is now a partner at Hamilton Place Strategies. “My progressive friends think certain businesses don’t deserve help. And my libertarian friends don’t want anyone to get help.”

The only viewpoint that’s missing here – is there anyone out there who just thinks everyone should get help? At least then we’d avoid that whole nasty #moralhazard problem… well, sorta (and then we can just let the “economists” figure out the rest?)

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Survival of the unfit?

There are enough jokes to go around on what businesses are considered “essential” in this age of coronavirus. In this case, sure, we can only think of one thing people are scrambling to get their hands on more than sanitizer or chicken – and that’s a boarding pass for their next Carinival cruise…

At least we know the Fed has our back.

WSJ: How Fed Intervention Saved Carnival

“The previously unreported tale of Carnival’s rescue shows how effective the Fed has been in turning the debt spigot back on for large corporations. Carnival may still founder if tourists shun cruises over the long term, and its new debt carries a far heftier price tag than previous offerings. But the immediate survival of the company, which employs about 150,000 people, is no longer in question.”

“Elliott’s owner, Paul Singer, and others have warned that this success story comes at a cost. The Fed could be setting the U.S. economy up for a harder fall down the road, they contend, by flooding markets with cash and spurring investors to prop up firms that may not be fit to survive.”

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Would you bother to play if you knew the game was rigged?

To be fair, we don’t know what the balance sheet of mom & pop Quality Electric Co. in Birmingham, Alabama might have looked like in this particular case either – but we’re guessing it couldn’t have been any worse than, say, what was about to happen to Millennium Management and ExodusPoint Capital Management. Unfortunately, in this “race to the bottom, er, bailout” we’ll probably never know for sure how the “little guys” might have fared against the “big guys” head to head, because according to BNN Bloomberg someone stepped in to pick the winners and losers before anyone even had a chance to get to the finish line…

BNN Bloomberg: Resentment grows on Main Street over bailout winners and losers

“…waiting for approval of her US$40,000 small-business loan last week when the government’s first-come-first-served lending program ran out of cash.

“Smaller companies like us are probably just going to be washed under the rug”


“Some billion-dollar hedge funds, too, have benefited from quick Fed action. A number of them, including Millennium Management and ExodusPoint Capital Management…”

“The basis trade was in a position to tank… The Fed responded, limiting losses. Both Millennium and ExodusPoint declined to comment.”


“…if one of the lessons of 2008 is to help Main Street as well as Wall Street, the lesson seems to be only partly learned. Americans live in two separate and unequal worlds, and the bailouts reflect this.”

“I really have no faith,” Shultz said. “I have no faith in the system. In this government. In this leadership.”


Not much new here, really. We wrote about a similar game two years ago… in case this one sounds familiar.

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When even your hedge fund peers think you’re “morally corrupt”

All we can say is, the system allows it. So, what does that say about the people participating in the system? How about the ones who created the system in the first place? (or better yet, the ones who allow it to continue?)

Bloomberg: Hedge Fund Managers Claiming Bailouts as Small Businesses

“A manager with a healthy business who takes advantage of a program that isn’t “precisely defined, is not only showing poor moral judgment and potentially hurting the reputation of the alternatives industry, but it’s also probably crowding out struggling workers and businesses severely impacted by Covid-19

“One manager, who asked not to be named, said he was outraged when he received a note from his accountant analyzing his potential eligibility. Why, he asked, would a hedge fund that collects management fees, and can make money if it’s skilled, avail itself of a government handout?”

“It’s a complete abomination,” agreed Nate Koppikar, a partner at San Francisco-based money manager Orso Partners. He noted that firms that avail themselves of the money may later be publicly identified under the Freedom of Information Act. “

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Banking on bad times? (or what happens when you know you’ll be made immune from a downturn)

While the world waits for “herd immunity” to take hold to help protect us from ongoing waves of the Coronavirus, a different kind of “herd” is once again being made immune from bearing any responsibility for their irresponsible debt-fueled actions over the past decade. And unlike with COVID-19, the government is guaranteeing their survival.

Forbes: Stimulus Money May Jumpstart The Economy, But Who Is Picking Up The Tab?

“There’s no doubt that it’s socially desirable to rescue our economy; but are we attempting to solve a debt problem by piling on more debt? That’s a scenario that may not end so well. “

“Also, why were we so focused on stopping a market correction? Doesn’t the mere drop in prices caused by a dramatic market sell off automatically help form the basis of the next market recovery? Socializing losses while privatizing profits sounds great politically, but with each successive crisis, the likelihood of future victories grows more remote.”

“…efficient markets, which automatically reallocate capital from failed businesses to successful ones, get unsettled when politically-powerful zombie firms (with far too much debt) successfully lobby for handouts when times get tough.”

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Bailing out summer in the Hamptons?

Is “summer in the Hamptons” for a certain segment of the population a “critical function of our economy” that requires a federal bailout with taxpayer dollars? You decide. Chamath Palihapitiya, founder and CEO of investment firm Social Capital, has an opinion.

CNBC: Chamath Palihapitiya: US shouldn’t bail out hedge funds, billionaires during coronavirus pandemic

“On Main Street today, people are getting wiped out. Right now, rich CEOs are not, boards that have horrible governance are not. People are,” Palihapitiya, an early Facebook executive, said on CNBC’s “Fast Money Halftime Report.”

“What we’ve done is disproportionately prop up poor-performing CEOs and boards, and you have to wash these people out.”

“Just to be clear on who we are talking about. We’re talking about a hedge fund that serves a bunch of billionaire family offices, who cares? They don’t get the summer in the Hamptons?” he said. “These are the people that purport to be the most sophisticated investors in the world.”

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Bad Behavior = Benefits & Bailouts?

Stamford Advocate: U.S. airlines want a $50 billion bailout. They spent $45 billion buying back their stock.

“But what I am saying is that the terms of the bailout money that the airlines get from us should reflect the fact that a substantial part of their current financial problem is of their own making.”

“But it’s a point that we should keep in mind every time we see companies line up at the bailout trough. If many of these companies hadn’t spent lots of money to buy back their own stock to prop up its price, they wouldn’t need anywhere near as much money as they need now. “

“The main reason companies buy back stock in the market, of course, is to support their share price. High stock prices not only make shareholders happy but also increase top executives’ wealth by making their shareholdings and stock-purchase options more valuable.”

“In addition, in many cases higher share prices help trigger higher executive compensation because share price is one of the metrics that corporate boards often use to determine executives’ compensation packages.”

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Tough decisions today. Who will value the future returns?

We don’t envy the decisions that policy-makers have to make in light of the Coronavirus crisis. We’re not going to pretend there are any easy decisions here. Or that there are any magic-bullet answers. Because there aren’t. It hardly benefits anyone if the entire system collapses at once. But, how we approach those decisions, how we apply them going forward, and how (if at all) we learn from and deal with the inevitable fallout from those decisions, will say much about our values as a society (or at least, the values of those in charge of making the decisions?).

History will be the judge on this one. As will all the people watching – and their reactions once the dust settles. The question will be – are enough even paying attention?

AP: Hawks no more: Fiscal conservatives embrace rescue package

“This is a response to an invasion,” he told reporters. “This is the kind of thing you’d have to do if we were at war.”

Failing to take dramatic action now, Toomey said, “would be a wildly imprudent thing, and it would probably result in such a severe recession — it might very well be a depression — and it could take decades to come out of this.”

The future will be more painful,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.”

Still, she added: “This is definitely not the time to worry about the deficit. This is the time to be borrowing as much as we need to deal with the huge health crisis.”

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When bailouts go bait-and-switch. Already.

It’s perhaps a minor example in the grand scheme of things, and especially given what’s likely to come, but the early signs aren’t good. While we fully appreciate that businesses and organizations will have tough decisions to make around how they stay afloat (or don’t), including whether they are capable of retaining employees, the stakes are raised when taxpayer money is involved (which is why we generally don’t love for taxpayer money to be involved).

One could even attempt to make a cogent argument (welcomed on this blog) that arts & music are an important form of social/cultural infrastructure valued by a not-negligible segment of the population. We can respect that. Whether a particular performing arts facility, in a particular building, with a particular governing board, with a particular set of individuals drawing down compensation — perhaps that’s a different story.

In this case, taking taxpayer money (questionable in the first place) while lying (or at least dealing in vagaries) about how it would be used is just a bad look. And to think, the bailouts are just getting started…

Washington Free Beacon: Kennedy Center Tells Musicians It Will Stop Paying Them Hours After $25 Million Bailout Is Signed

“Congress included $25 million in taxpayer funding for the Kennedy Center, a provision that raised eyebrows from both Democrats and Republicans, but ultimately won support from President Trump. The bailout was designed to “cover operating expenses required to ensure the continuity of the John F. Kennedy Center for the Performing Arts and its affiliates, including for employee compensation and benefits, grants, contracts, payments for rent or utilities, fees for artists or performers,” according to the law’s text.”

followed quickly by:

“Everyone should proceed as if their last paycheck will be April 3,” the email says. “We understand this will come [as a] shock to all of you, as it did to us.”

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Faith in the powerful? Whose power?

We don’t necessarily envy the role Steve Mnuchin has to play right now, but this article could’t help but get us thinking about the very tenets of the Economorals blog (particularly the last one on the list below). A refresher:

  • Who gets to define “need”? Who gets to define “want”?
  • Ask not (yet) what your economy can do for you.
  • Ask not (yet) what you can do for your economy.
  • Ask first: What purpose does your economic system serve in the first place?
  • Ask then: How closely aligned are the views & values of popular economists to your own, as they relate to the previous question??

The Week: Coronavirus stimulus will make Mnuchin ‘one of the most powerful Cabinet members in modern history’

“…a $500 billion funding program, and Mnuchin will oversee how it’s distributed to local and state governments, as well as businesses, the Post notes. He’ll undoubtedly face pressure from corporate executives looking for bailouts from that fund, and will have to weigh those pleas alongside the needs of taxpayers.”

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