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Live Without a Parachute; ie No Moral Hazard! July 23, 2008

Posted by shaferfinancial in Uncategorized.
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The new catch phase around the net is moral hazard.  Described as the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk, moral hazard is being bandied around the idea of bailing out Fannie and Freddie.  But moral hazard has been created by the government for a long time through its policies.  Take FDIC insurance for example.  People are protected from the possibility of losing money in banks (up to $100,000).  This is surely moral hazard and I am glad its there.  Or the tax laws which allow tax deductions for mortgage interest and real estate taxes.  Once again protecting folks from the real cost (risk) of home ownership.  And of course the grandaddy of them all social security.  Without which 90% of retired folks would be starving.  Yep, protected from their failure at saving money, but without that protection we would live in a different, much colder, Dickens like world!

Remember it is easy to throw stones at the mortgage folks now, but if you really want them to suffer the full consequences of their actions, then you might want to look at the full consequences of individual behavior along with it.  Without social security in your future, are you prepared to starve? Or are you going to be capable of living off your savings for 20 years?

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Comments»

1. Tom Vanderwell - July 24, 2008

David,

I just thought I’d stop by and say Hi! I’m glad that you’re keeping the topic alive over here too.

Thanks for being so intellectually challenging, I appreciate it!

Tom

2. Artur | Phoenix Real Estate - July 24, 2008

The US capitalist system is by far more brutal then others. This is a trade off, I believe, between access to more ways to built wealth vs. the stability and cost of a more social system. Still, without the safe guards you mentioned there would probably be no middle class at all.

3. shaferfinancial - July 24, 2008

I agree with you. People take the middle class for granted, but it was created by the blood and sweat of many. Now it is being hallowed out. Even more critical to become an active investor now, than before, when you could depend upon a defined benefit pension and company loyalty to workers.

4. shaferfinancial - July 24, 2008

Tom, I think it is an important one. There is much antipathy to big business. Just want people to remember that much work has gone into the building of the middle class and much benefits accrue to it from the government!


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