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71 - Moral Hazard: Why government bailouts are counterproductive

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Release Date: 04/12/2020

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More Episodes

Mental Models discussed in this podcast:

  • Moral Hazard
  • 2nd Order Effects
  • Anti-Fragile

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode71

Government Bailouts create moral hazard in the economy

  • Government bailouts reduce or eliminate the incentive for businesses to prudently manage their finances.
  • Moral hazard is created by these bailouts. CEOs, board members, and shareholders know that any profits they make they get to keep. Yet, if massive losses appear they can simply appeal to future government leaders to save their job.
    • This has to stop!
  • If you privatize profits and socialize losses, this isn't capitalism. Instead, it creates a situation where the public becomes aware that the game is rigged and wants to tear down the whole system.
  • The Federal Reserve and the United States government have repeatedly implemented a playbook where they try and prevent recessions and bankruptcy. This perverts the intent of capitalism.
  • We are meant to have cycles. We are expected to have businesses fail. Only by allowing weak and poorly managed businesses to fail can we truly have stronger businesses arise and grow at their optimal rate. 

Summary:

The United States Government and governments around the world have been behaving in a manner that is counterproductive. They have created a moral hazard of encouraging individuals and businesses to take selfish action and to not manage their affairs prudently because they know that they can expect bailouts in the future. 

In the short term, this seems like the right thing to do. Yet, it lays the groundwork for the long-term failure and fragility of our economic system.