One of the topics that came up at a recent economists chat attended by yours truly concerned not the global economic order, but the state of corporate America and moral hazard.
Is 'gov' insurance encouraging corporate abuses?
Most economists agree that banks and comparable financial institutions (FI) critical to the financial system should be backstopped by the U.S. Government, at least to some degree. A backstop is particularly critical if a bank failure would create systemic risk, i.e. jeopardize the financial system. The recent bank rescue and AIG (NYSE: AIG) takeovers are two examples.
More recently, however, a push has been made by various lobbies (corporate, labor union, regional states, among others) to rescue key industrial institutions, with the ailing auto companies, General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler being front and center. Moreover, the logic of an auto sector rescue is reasonable enough: the economic and social consequences of a failure by one or more auto companies would be far worse than the costs of a government rescue.
Still, as economists Richard Felson and David H. Wang pointed out, if a corporation assumed that the worst financial and corporate consequence from their flawed business models and/or bad decisions would be an infusion of government/taxpayer cash, would that cause management to operate the business differently?
Even more skeptically, economist Peter Dawson posed, would the likelihood of a government rescue cause management to bestow even larger compensation and bonus packages on executives, knowing that the shareholder would not bear the full cost? Would it cause executives to become even more reckless with capital? Would they delay belt tightening, or other warranted decisions, because corporate executives know that the 'day of reckoning,' is not near, or in fact, may never come to pass?
Corporate Analysis: The above is the crux of the moral hazard issue - - essentially that government backstop/ insurance encourages executives to take unreasonable risks or operate businesses recklessly or ineffectively. (A good analogy would be a sports car: does a modern BMW sports car with anti-lock brakes encourage drivers to drive faster than they would in a typical sedan? Another analogy: would the presence of low-cost lumber/building materials encourage one to build several mansions for oneself?) Amid the calls for an auto company rescue, it's an issue Congress needs to investigate, and one for which, at least at this juncture, there are no simple or cost-free solutions.
Closing Bell: When the unemployed govern the markets (AIG, DSCO, FSLR, TIVO)
Still gloomy -- another 467,000 jobs lost last month
Cramer on BloggingStocks: This market knows something we don't 
Reader Comments (Page 1 of 1)
11-07-2008 @ 2:13PM
Virgil Bierschwale said...
Oh yes, I have added Chrysler, Pfizer and the Nielsen Co. to the "Wall of Shame" today at http://www.KeepAmericaAtWork.com
More and more readers are sending in the links to the companies that are putting our taxpayers out of work just to transfer our capital from democratic countries to countries that don't even believe in democracy.
So please keep sending in those links to the companies that are sending our work offshore as all of America needs to know what you are doing and who your name is.
Virgil
http://www.KeepAmericaAtWork.com
11-07-2008 @ 2:57PM
Virgil Bierschwale said...
I was leaning towards giving Chrysler a "yes" for a tax payer sponsored bailout.
After all, thats what it is isnt it ?
The taxpayer's money ?
Then a reader sent me an article about how Chrysler sent the taxpayer's packing in order to save money by sending their work offshore.
Now you want to take money from these taxpayers that lost their jobs to Chrysler to bailout the same company that screwed their employees in the name of a profitable bottom line.
Now thats a very huge slap in the face and I'll bet you your salary against mine that if you ask those employees whether they are willing to help bailout chrysler to save it, or watch them go out of business, that they'll bring the tailgate party and set up the bbq and beer and chairs just to watch them get what they gave to their employee's.
Get real.
No damn bailout for any corporation that stuck it to their employee's and sent their work overseas.
Virgil
http://www.KeepAmericaAtWork.com
11-07-2008 @ 4:23PM
jmanley said...
If the government wants to bail out GM, let's get double our money by requiring the company to produce only hybrid and electric vehicles going forward. That way our taxpayer investment at least goes towards developing technologies to move us towards energy independence.
-jmanley