A Never-Ending Story of Bailouts, Moral Hazard, and Low Economic Growth

by Klajdi Bregu

The recent economic downturn has created the environment for a new round of bailouts by the government and the Fed. Last time they did this they told us it would be the last one, but anyone who knows our history knew that was not going to stand. Now we are told again that this is an exceptional situation and we must bail out businesses in trouble so that the economy can restart again as quickly as possible. But this is the same argument the government has always made when pushing for a bailout. What is more, every time the government has bailed out businesses, they have promised us that this will not create moral hazard.

Moral hazard here refers to the ability to take risk without fear of suffering the consequences. As I show below, businesses profit by making bad short-term decisions, and when these bad decisions bring them to the brink of bankruptcy, they are bailed out by taxpayers.

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