http://robertreich.blogspot.com/2008/03/moral-hazard-redux.html
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One day while sitting on a beach last summer I overheard a father tussle with his young son about whether the child was old enough to take out a small sailboat. The father finally relented. "Go ahead, but I’m not gonna save you," he said, picking up his newspaper. A while later, the sailboat tipped over and the child began yelling for help, but father didn’t budge. When the kid sounded desperate I put down my book, walked over to the man, and delicately told him his son was in trouble. "That’s okay," he said. "That boy’s gonna learn a lesson he’ll never forget." I walked down the beach to notify a lifeguard, who promptly went into action. Letting children bear the consequences of their risky behavior -- what some parents call "tough love" -- is equally applicable adults, and conservatives have made something of a fetish out of it. A few weeks ago, as George W. announced a paltry plan to help out a few of the millions of homeowners who got caught in the sub-prime loan mess, he reiterated the credo: "It’s not government’s job to bail out ... those who made the decision to buy a home they knew they could not afford." It’s true that people tend to be less cautious when they know they’ll be bailed out. Economists call this "moral hazard." (...)
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The Biggest Bailout in History: And Why American Taxpayers Should Get Some of the Upside
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So JP Morgan is raising its offer for Bear Stearns, hmm? Well, it still may be a good deal for old JP, because the worst that can happen is JP loses $1 billion. If losses turn out to be more than $1 billion, the Fed – that is, you and I and every other American taxpayer – will make it up to JP. Who knows what the assets are really worth? They may be worth 80 cents on the dollar, in which case Bear’s stocks are a huge value even at $10 a share (remember, their market price before the panic was around $70 a share). They may be worth 90 cents on the dollar – even better for JP. Or they may eventually (in the long run, when the crisis is over and housing values start trending upward again) be worth far more --- maybe, just maybe, even approaching $70 a share. JP doesn’t know. Bear doesn’t know. The Fed doesn’t know. Everyone is guessing. Bear shareholders are playing a giant game of “chicken.” They’re threatening to go into bankruptcy – that is, liquidate the firm and essentially sell off their assets in an auction – if they don’t get a better deal from JP than the $2 per share JP originally offered. But it's not just Bear's shareholders who should be asking for more. You and I as taxpayers ought to be asking for more, too (...)
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