Bailout 10: Moral Hazard

Alternate plans and moral hazard.

Category:

Education

Tags:

• fed
• bailout
• paulsen
• bernanke
• credit
• crunch
• lehman
• aig

[andrewedwardjudd]

Moral Hazard: Sal, mum and dad savers who are *lenders to the bank* are "greedy capitalist pigs who deserve punishment"??, *nobody* will ever save again if you talk like this. Savers have got bugger all interest. Speculators got the rewards. You need to separate out the "evil bank lenders" from the savers who for example want to have something for retirement. Please focus more on the equity holders rather than the savers and other ordinary depositors who the bank is liable to return money.

[khanacademy]

Savers are not effected if the banks go under. Their deposits are insured (and I think it is good that they are). Also, I am talking generally about commercial and *investment* banks (like Goldman and Morgan Stanley which, until recently, were not commercial banks and therefore did not take traditional deposits).

[mimarino9]

I was with you through videos 1-9, however I have to take issue with the position put forth that the fed or the Government (not sure which you were referring to) should lend directly to the consumers (farmer etc). The fed will have to print this money which would create massive inflation. They are getting this $700B from the Fed guarunteeing a line of credit. It's hard to promote the invisible hand of the market without denouncing the invisible foot of the Government!

[khanacademy]

I agree with you. I don't think direct loans would be a good idea either. I just think that it would have just as good chance of working and at least it wouldn't be as "morally hazardous". Frankly, I don't think we can legislative ourselves out of this.

[gambuzo]

Fantastic series of video, Sal, thank you !

But I wonder why you say that the CDOs may be worth "nothing, zero". Isn't it that their value is equal to the money the bank can get back by selling them (for the most part, they are mortgages) ?

[khanacademy]

Your argument would be true for most mortgage back securities. Remember, CDO are MBS's sliced up so many of these CDOs may be the riskier tranches (or buckets) that get wiped out only if you have a 10% loss on the underlying assets (or collateral)

[KoffKofy]

Sal for president!

[phoenixshade3]

In other words, the Paulsen plan is to SOCIALIZE RISK while PRIVITIZING GAIN.

Think about that. You and I get to cover the potential losses, so that people that are making the bad investment still get the reward.

[TheMailprasad]

Mr. Khan, if you can make a video on Eurozone debt crisis or at least Greek debt crisis, it will be great. Thanks

[jmuench420]

@mintoo2cool The FDIC takes care of people the bank's account holders, up to $250,000 per account.

[flyingbeagles]

There needs to be less politicians meddling in economics and more Sal!

[ladicius]

has anyone shown this to obama? i'm not sure he's aware of what's going on...

[oneyedo]

@andrewedwardjudd douche

[parklinkin52]

@drzakir123 Cite me the passages in the bible and koran that mention interest please

[drzakir123]

@khanacademy bottom line is interest[usury] is the root cause of this problem which is rightly ban in all the major religion and very specifically in islam.i think the system is evil from its core.may god bless you

[dalcde]

I think after this economic downturn, the government should say that all non-fixed assets must be booked according to market price to let the banks know what they really have.

[arlenschmidt]

WHen you talk about a bank maring their assets to $500m forcing other banks to do likewise - how do you know, as an investor with limited transparency - that such a writedown would be appropriate for the other banks? If other banks simply claim to be holding more senior tranches in the CDOs then they could argue that such arge writedowns are not aplicable to them and an investor would not be none the wiser.