13 votes

Fed Policy is Working: Moral Hazard is Back!

John Rubino | Dollar Collapse: A near-death experience isn’t something one gets over right away. So it’s no surprise that the US leveraged speculating community was a tad more cautious than usual for a while. Real estate investors, for instance, still bought houses, but only on very favorable terms where rental income would clearly exceed expenses. And investment banks still repackaged loans into asset backed securities, but on a very small scale, since there weren’t that many willing/able buyers for exotica that was “toxic” so recently.

This was completely unacceptable to Washington, of course, since the only way an over-indebted economy can “grow” is if speculators can be induced to take unwise risks. So this year we entered the whatever-it-takes phase of the process, where borrowed money became nearly free and permanent, open-ended quantitative easing was promised.

It was a Hail Mary pass, but it seems to have worked, at least in the narrow, Twilight Zone terms in which today’s system operates. That is, moral hazard — the sense that you can do pretty much anything you want because the government will bail you out — is back as a driver of deal making. See this on the return of a practice last seen during the housing bubble: