The True Moral Hazard of Bailouts

from Eric de Carbonnel, an admitted perma-bear and market skeptic:

Most commentators misunderstand the true moral hazard of bailouts. While bailouts might have an adverse effect on the future actions of individuals and businesses by encouraging risk taking, the real problem is their effects on future actions of the government. Specifically, each bailout makes it harder to say no to the next bailout. This pressure to fund future bailouts is made far worse if those receiving bailout money are truly undeserving. After all, if the government is going to give $45 billion to Citigroup (one of the banks responsible for our current mess) and insure $306 billion of its riskiest assets, then how can it say no to bailing out the state of California or South Carolina?

This “me too” phenomenon will get much worse after the treasury market collapses, and the fed starts monetizing the treasuries that were sold to fund the current bailouts. If the Fed printed money to bail out the banks, why shouldn’t it print more money to fund unemployment benefits? Politically speaking, you can’t bail out the irresponsible and then let the responsible sink, which means Congress isn’t going to be saying no to a lot of the bailout requests this year. Unfortunately, these bailouts will become increasingly meaningless because, when you bail everyone out, you bail no one out, as you destroy your currency.

That was an excerpt from Eric's "Ten Major Threats Facing The Dollar In 2009" for the full treatment. It was written in January, and the bailouts and takeovers have only accelerated since then, as have the attacks on the status of the U.S. dollar as the world's reserve currency.

We are in a brave new world. We are going to have to educate ourselves about debt, currency and monetary policy. And gold, silver and other "physicals." Watch the stock market if you're worried about your retirement. But it's what happens to the money supply, the bond markets and the currency markets that is going to determine our standard of living in the not distant future.