
Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one - jameslk
https://www.reuters.com/article/idUSKCN21U0GV
======
davidxc
The statement about the lack of inflation from QE and other stimulus programs
from 2008 is pretty questionable. There's been little inflation as measured
using usual consumer price indices, but the construction of those indices is
typically fairly focused on consumer goods and underweights the assets that
rich people tend to invest in (stocks, real estate, bonds, etc).

The QE and stimulus programs from 2008 were significantly more targeted toward
the upper and upper-middle classes (arguably without that much trickle-down),
and so there wouldn't be much significant inflation as measured by consumer
price indices.

But if we look at the assets that rich people invest in (since it's mostly
wealthier people who benefited from the 2008 stimulus programs), then I'd say
there's been a significant amount of inflation - P/E ratios for stocks have
been historically high in the last few years, real estate in desirable cities
has gotten significantly more expensive, and bond yields have been low.

We seem to be already seeing some of the same, with the stock market being
pushed up by the Fed's commitment to 4T+ in stimulus this time around and ever
lower interest rates.

~~~
AngrySkillzz
Every HN thread on economics has a bunch of comments like these that are
earnestly misinformed about economics. When commenting on something outside of
your wheelhouse, please recall Socrates from the Apology: "I observed that
even the good artisans fell into the same error as the poets; because they
were good workmen they thought that they also knew all sorts of high matters,
and this defect in them overshadowed their wisdom."

I'll point out just two deficiencies in these threads and leave the rest to
you. If P/E ratios in the US are "too high," then people would invest their
money elsewhere for better return, right? Maybe international stocks or bonds
or whatever. And why don't they, if they have every incentive to seek a better
return? Because there are no better returns, even in countries with higher
interest rates. So how could P/E ratios be too high? The more likely
explanation is that this is the "new normal" \- savings outpaces investment
opportunities for many reasons (aging populations, growth in countries with
stronger saving cultures, etc.), which pushes up the premium on assets.

Second, on the subject of interest rates and QE, a little international
perspective would make you reconsider the effect on the overall economy. All
other developed economies have lower interest rates, more QE, and slower
growth than the US. Look at Europe, look at Japan. The issues of "why are
asset prices rising" and "why is inflation low" are much larger than just US
policy. We are talking global trade and demographic factors that influence
these things. The current stance of fiscal and monetary policy is the symptom,
not the cause. And in fact the US has been significantly more successful than
our counterparts on that topic, as a fast and strong response in 2008 pre-
empted the kind of drawn out economic malaise seen in Europe, where the ECB
waited years before easing policy to the degree that we had. Now Europe has
lower rates, more QE, lower inflation, a worse labor market, and less growth
than the US. And that's before factoring in the coronavirus crisis. Policy may
have increased inequality in some ways, but if you're going to make that claim
you have to also answer the corresponding counter-factual: potentially the
poor would have been even worse off (relative to the rich) if there were no
policy interventions and the labor market collapsed. There have been some
papers on the topic, and it is not at all obvious that inequality is worse now
than it would have been if there was less policy intervention.

~~~
davidxc
I never said that P/E ratios in the US are "too high". I said that they've
been higher in recent years than in past history.

This is, as you said, because the amount of money chasing investment
opportunities is increasing. I agree that the reasons for this are complex,
but one significant reason that the amount of money chasing investment
opportunities is increasing is central bank stimulus (not just in the US, but
worldwide).

The rise of asset prices definitely is a much more complex issue than just US
policy, but I'd still argue that stimulus by the US is one of the causes, not
only a symptom.

I agree with you that the US has been more successful in managing the 2008
crisis than the ECB, and that part of that was because we recognized that we
needed stimulus earlier on in the crisis. But this doesn't contradict anything
else that I said.

I also never made the claim that the counterfactual of no stimulus would have
been better - I personally believe it would have been worse, since the economy
and labor market would have likely went through a longer and more serious
collapse. But again, this does not contradict what I said about central bank
stimulus being one of the significant causes in the rise of prices in
financial assets.

~~~
bobthepanda
> I also never made the claim that the counterfactual of no stimulus would
> have been better

To be fair, that wasn't the only option. There was the debate in 2007/08 about
how much of the stimulus should be monetary vs handouts directly to taxpayers
vs infrastructure. There's some who believe that the "infrastructure" portion
was too small of the pie, hence the stomach for things like "Infrastructure
Week" from Trump or "Green New Deal" from the left wing of the Democrats.

~~~
mrosett
In the abstract, I liked the idea of spending it on infrastructure, but over
the ensuing decade I’ve become deeply skeptical of the ability of the US
government to effectively spend more money. California high speed rail and the
NY subway are exhibits a and b.

~~~
yamoriyamori
I agree with you (to your point) about California high speed rail: a solution
looking for a problem. But NY subway is arguably something that could generate
huge returns if the capex was committed to modernizing and automating the
public transport of the biggest city in the USA and a major financial capital.

------
devit
Well, not really: bailouts punish people and business who incurred costs to
operate in a way that would allow them to pause their economic activity for
months (cancellable supply/rent/employment contracts, cash reserves, etc.),
and favors those who did not do so.

In general, a society where it is possible to pause all economic activity at
any time is going to be much more robust than one that doesn't, and is going
to reduce the impact of an apocalyptic event that the government cannot bail
the society out of, possibly avoiding human extinction in the most severe
cases.

For instance, if everyone stores several years worth of food and water at
home, then even the most catastrophic events are much less likely to kill the
vast majority of people in the world.

So, there is a moral hazard, and it may be wise to either minimize the
bailouts or to make such resilience mandatory.

~~~
twblalock
Businesses were never expected to be able to totally shut down for months at a
time. It’s not reasonable to suggest that businesses who can’t handle that
have been irresponsible or are less deserving of help.

~~~
HarryHirsch
Wimbledon took out a pandemic policy year after year. Turns out they were
stupid to do so, they could have invested the insurance premium in the stock
market and waited for their bailout.

~~~
gerdesj
Think in risk terms. When they were assessing the risk to their business posed
by a pandemic then they could not foresee the govt response. An insurance
policy is (almost) certain to pay out. Risk assessed and mitigated. "turns
out" is not a method I use for business planning.

I'm not sure what sort of bailout they would get either. My firm does not
expect a loss of earnings style bailout. I would venture that they did the
right thing.

~~~
treyfitty
Insurance is most certainly NOT certain to pay out. Case in point Star Cinema
Grill; albeit this is an egregious case where the insurer is blatantly arguing
and bluffing a lawsuit. Insurance will fight tooth and nail to not pay out.

[https://www.insurancebusinessmag.com/us/news/hospitality/llo...](https://www.insurancebusinessmag.com/us/news/hospitality/lloyds-
of-london-underwriters-hit-by-lawsuit-from-pandemiccovered-cinema-
chain-219185.aspx)

------
chewz
> “Colonel Cargill was so awful a marketing executive that his services were
> much sought after by firms eager to establish losses for tax purposes. His
> prices were high, for failure often did not come easily. He had to start at
> the top and work his way down, and with sympathetic friends in Washington,
> losing money was no simple matter. It took months of hard work and careful
> misplanning. A person misplaced, disorganized, miscalculated, overlooked
> everything and open every loophole, and just when he thought he had it made,
> the government gave him a lake or a forest or an oilfield and spoiled
> everything. Even with such handicaps, Colonel Cargill could be relied on to
> run the most prosperous enterprise into the ground. He was a self-made man
> who owed his lack of success to nobody.”

Catch-22

~~~
pjmorris
Thank you. It's been too long since I read this, putting it in the 'to read'
pile.

------
Ancalagon
Looks like these reporters have missed the entirety of reddit, there is plenty
of criticism there, from what I’m assuming amounts to thousands or millions of
people.

~~~
amiantos
The article seems to be about how the political response from conservatives
seems to be muted, making the point that all their talk about small
government, no regulation, and the evils of socialism appear to vanish the
moment the people who need government assistance are millionaires and not
common folk.

~~~
armada651
While I definitely don't make a habit of defending conservatives, when they
were concerned about the fed "picking winnners" the winners the fed picked
were generally the millionaires.

~~~
AnimalMuppet
But if the government picks winners, they might pick the wrong millionaires,
instead of "all millionaires".

------
vfclists
The moral hazard overlooked here is the fact US govt policy being dictated by
congressmen, hedge fund managers and "investment" bankers who see it terms how
they can profit from a long bull run, and profits to made from shares in the
companies who have quasi-monopolies on the the products that will eventually
"save" us from coronavirus.

And the fact that you can't expect a health system run for profit to prepare
properly for a pandemic which may never happen.

By the time the products ordered for the crisis have been delivered the crisis
will be over, and whether they will be stored in preparation for another
pandemic is questionable.

------
KKKKkkkk1
_People are undertaking sacrifices for the common good. We need to make them
whole. To the extent we have the ability to make them whole we should be doing
that as a society,” Powell said. “They didn’t cause this. Their business isn’t
closed because of anything they did wrong. They didn’t lose their job because
of anything they did wrong.”_

Why is it important if anyone did anything wrong or not? The world is
experiencing a massive calamity and a lot of wealth is being destroyed. It's
not obvious that you can make everyone whole without causing unintended
consequences.

~~~
LatteLazy
It matters because after this crisis, in a few months time, we want them to go
back to doing what they did before. You want people to go right back to
opening businesses and getting jobs and buying houses, as quickly and
enthusiastically as possible. More so if we can manage it. That's what
prevents a crisis from becoming a depression.

------
skat20phys
I'd argue that's in part because of the protection racket that's partially at
the heart of the moral hazard: the poor regulation of healthcare services, at
least in the US.

What this should be laying bare is the failure of federal regulation, how this
got in the way at a critical moment, and when it was too late, things only got
better when they got out of the way. Or what about a healthcare system
oriented toward protecting the hospitals, those at the top of a hierarchy, the
rent seeking, and so forth, rather than oriented toward public health? What
about an artificial reduction in the number of providers to increase their
salaries, a lack of competition in provider models and delivery of services?

There was a Slate article about how one side-effect of the pandemic is how
much it has exposed bullshit everywhere, how easily so many rules are set
aside when the cards are on the table. Some of this is happening now with
healthcare, but few are asking what else could have been different, other than
single payer care.

To me this all feels like some kind of abuser-victim relationship, where
people are subject to some broken system, and then when things go wrong and
are failed, they're made to be dependent on their broken system and start
cheering it on.

I realize this all sounds bleak but to me there are so many things that could
have been avoided, from the highest levels of the government all the way down,
and there seems to be little introspection about this. Instead we just blame
the virus, rather than what caused our systems to be so vulnerable in the
first place.

~~~
cvlasdkv
I agree with criticism of governments in these instances but in order to be
more thoughtful we should be critical of _how_ the governments ended up in
this state. In other words: I do not think that the government (as a concept)
is the issue here. I think that the current (and decades past) American
government is the issue. They are 100% corrupt and culpable but it is not
inherent to every government.

Note: I am NOT saying you are ignoring what I've said above. I have just seen
many people make poor generalizations about government because of their
experience with the American government's inability to prioritize citizens
over the networth of the elite.

------
wtvanhest
The biggest moral hazard is in colleges. The boards of colleges justified
higher expense structures in the name of trying to win a zero sum rankings
game.

The best case for them is a lot of people wondering why they are paying $30k a
year to watch online lectures while inflation wipes out the debt.

The worst case for schools is a total restructure due to lower revenue and
donations due to students unwilling to overpay to sit at home and alumni not
having the funds.

The future is no college degree at all.

~~~
jdm2212
> The biggest moral hazard is in colleges. The boards of colleges justified
> higher expense structures in the name of trying to win a zero sum rankings
> game.

That's not what "moral hazard" means.

~~~
wtvanhest
For clarity:

“In economics, moral hazard occurs when an individual has an incentive to
increase their exposure to risk because they do not bear the full costs of
that risk”

In this case, the risk is the increased cost structure in order to get the
benefit of accolades from winning the zero sum rankings game.

If it were their money instead of the universities’ money, they likely
wouldn’t have increased the cost structure

------
the-dude
In The Netherlands, our government reserved a special € 100 million for
startups, because they are not eligible for the normal relief program because
these startups have no revenue and "their succes is measured differently".

In the grand scheme of things, € 100 million is peanuts of course. Still I
found it baffling. I should also mention these are loans, but if the startups
fail the government is still holding the bag.

~~~
lowdose
There is no default in the Netherlands, so the entrepreneur is always holding
the bag.

~~~
stdbrouw
There is. [https://business.gov.nl/starting-your-business/choosing-a-
bu...](https://business.gov.nl/starting-your-business/choosing-a-business-
structure/private-limited-company-in-the-netherlands/)

------
crazygringo
I see so much talk here on about how companies should be left to go bankrupt
because of their "shitty decisions", that "the weakest companies should be
allowed to fail", and "shareholders have to hold the bag" (all from comments
here).

This fundamentally misunderstands how businesses work.

If your business has a 5% profit margin, and you're supposed to have enough
savings to weather, say, six months of essentially full fixed costs but zero
revenue... that means you would need to save a full _ten years of profits_
before ever returning them to shareholders, and if your company is less than
ten years old, goodbye.

That's ludicrous.

It's also against the "accumulated earnings tax", where the IRS virtually
requires companies to return their earnings to shareholders (via
dividends/buybacks) yearly, because they're financially penalized otherwise.

Good management teams aren't supposed to save for pandemics. It's not normal
business. Companies in general are _unable_ to buy insurance against it
(because there's no insurance company with enough money to pay out).
Capitalism is about weeding out the better companies from the worse -- not
ones that are arbitrarily more or less hit by an unpredictable global
catastrophe.

Letting swathes of companies go bankrupt through zero fault of their own is
economic disaster, and neither is there anything remotely fair or capitalistic
about it whatsoever.

~~~
Apes
I find your implied assumption that starting a company should in normal
circumstances be seen as a get rich scheme that pays out in under 10 years as
completely toxic, but that's an aside.

The point is large companies shouldn't be hurting for money, they have two big
options on the table to generate money right now: issue stock or bonds.
However, there are a lot of really stupid large companies that decided to max
out their credit cards in the good times to pump up their stock price via buy
backs. They can't issue bonds, but they could still issue stock. However, that
would cause the price to crash, and Trumperino in Chief can't allow that to
happen.

~~~
lazerpants
Of course, the Fed is implicitly at fault here too for keeping interest rates
too low for too long. They tacitly encouraged borrowing with low rates. If
rates had been higher, companies would be thrilled about lowering rates due to
covid and would start to issue bonds.

------
throwaway13337
There seems to be little talk about it on main stream media but it doesn't
feel like that's the general sentiment.

The narrative has been mostly contained. It's scary times, really.

------
Apes
This article is no way reflects reality. There's a reason the "money printer
go brrr" meme is blowing up. There is already significant outrage about the
moral hazard of what's being done by the fed, and the sentiment is growing.
This article reeks so badly of blantently trying to control the narrative to
the advantage of the elite that it's disgusting. Rather than let companies
that made shitty decisions die and let capitalism operate, we're creating a
horde of zombie companies that are going to plague our economy for decades.

Welcome to the beginning of the lost decades. With these policies, it's going
to decades before we see any true economic growth in the US.

~~~
mindslight
Who needs economic growth when we can just lower interest rates to make The
Line keep going up? It's been working over the past few decades...

~~~
cvlasdkv
In a sense if we can collectively agree that the future will be better...
we're all fine. We are in a crisis but there is really no reason that if the
world stopped improving _today_ we would not be fine as a species. Good, even,
if we redistributed wealth from hoarders.

Alas, said hoarders are the ones who make everyone else believe that The Line
means more than anything else.

------
pandesmos
I don’t understand this stuff. Politicians have directly ordered closures. If
your bottom falls out from under you because you were playing fast and loose
that seems inherently different than being told from above “you just cease
your main method of generating revenue until we tell you otherwise.”

~~~
anonuser123456
You're asking me,(general tax payer) to give you money to ride out the storm,
but you get all the private gains in the future while I take the risk now.

There is a much more fair way to do this. Firms simply issue new stock and
sell it to the market. Firms get the capital they need, the general tax payer
isn't holding the bag.

~~~
pirocks
I find it interesting that this entire thread seems to be about fairness.
Whether something is fair to corporations/people really shouldn't be the
point. It should be about keeping people alive and having a
functioning/prosperous economy. I'd much rather have that than a "fair"
economy.

~~~
ntsplnkv2
A propped up fake economy that continues to grow income inequality?

Fairness matters in an economy and government. If less people have faith in
its institutions it will begin to break down.

There needs to be a trade off.

------
colonelanguz
This was incredibly frustrating to read because, intentionally or not, it
perpetuates and normalizes the actual moral hazard of this crisis. It
conflates the correct notion that if the government is forcing people not to
work, it should make sure they don't starve to death, with the false notion
that, in a capitalist society, businesses who were so balance sheet reckless
that they couldn't last a month without government loans ought to be bailed
out simply because it's "not their fault" that an economic crisis exposed
their irresponsible planning.

That's not how capitalism works; the weakest companies should be allowed to
fail. The government can still lend to keep their workers alive, but what it's
really doing in this crisis is keeping their stock price alive, which
overwhelmingly benefits corporate insiders and rich people who own stocks.
That's the opposite of how the corporate form is supposed to
work—equityholders get all of the upside on a sunny day, so they're entitled
to ZERO protection on a rainy day. It's risky to buy stock. Buy bonds if you
don't want to shoulder risk.

The most frustrating thing to me is that the same companies who are asking for
buyouts could have simply held excess cash, or raised their employees' wages,
or invested in profitable assets—all things you expect companies to do under
capitalism! But instead, they invested in stock buybacks, which means
literally spending retained earnings on inflating their own stock price. Apple
is a classic example: earnings has actually been flat since like 2015, but
earnings _per share_ has gone up because Apple has bought back $250B of its
own stock in the last eight years or so. But at least Apple is solvent! The
airlines, for example, are asking for a bailout in almost _exactly_ the same
amount that they have spent on stock buybacks in the last several years. It
frustrates.

~~~
macintux
I don’t think the problem is “a month” of inactivity, although clearly there
are no shortage of people and businesses who can’t survive even that.

The real problem is that we’re a month in and there’s no genuine end in sight,
optimistic politicians notwithstanding. The actual end of the crisis could be
two months away or two years.

~~~
colonelanguz
That's a fair point. It doesn't make me feel any differently about the
proposition that, in a society that preaches values like rugged individualism
and fiscal responsibility to its poorest members, it's strange to me that 99%
of the government's per capita expenditures are going to places other than the
people. Literally 99%. And by blindly subsidizing every single business,
including like hedge funds and other speculators who partially caused the
liquidity crisis, the government in sowing the seeds for the next meltdown and
disguising insolvent firms as economically viable ones. All of which is bad
for society and the economy.

~~~
macintux
Yeah, I've definitely been in the UBI camp for a while, and I'm hopeful that
if nothing else positive comes out of this that we'll rethink how we're
structured as a society in that regard.

So it's safe to say I think more of the money should be going directly to the
most vulnerable, but I'm also sympathetic to the point that, at least as far
as the way we've structured our economy, public companies aren't _allowed_ to
prepare for a 100% loss of business for months at a time. How much grief did
Apple get for sitting on a pile of cash when it could be "better spent
elsewhere"?

