Tuesday, September 16, 2008

Moral hazard: gitu gani hii?

In simple terms, economists say that in a perfect market, price will always go back equilibrium except where one of actors in the market behaves in a non-rational manner or when a non-market actor intervenes in an non-inefficient manner. The first is often seen in the insurance market where because you know you are insured, you may become more reckless. The second is where the govt not knowing or having been negligent in its duty flies in with tax money and rescues a firm in a particular sector or market. The hazard is that it now becomes a given that every other firm in the said sector/market will be rescued by the govt if its unable to continue its business. In some countries it become known as the tbtf (too big to fail) syndrome. The second hazard is that at some point, the govt will find that taxpayers baulk at paying for another profit-making firm to be rescued. This typically tends to be a bigger firm than the one the govt initially rescued.

Moral hazard of the non-market actor type abounds everywhere. Kenyan parastatals and partially-owned firms all fall under this line. Most operate like they can always be rescued tomorrow. In the US/UK markets, banks have been behaving with tbtf effect since Bear Stearns was rescued earlier in the year.

Bottomline: Govts either need to acknowledge that moral hazard exists and act appropriately or it doesn't and then be consistent.

6 comments:

ka-investor said...

I'm very surprised by the events in the US. Americans have always stood out as proponents of less government interference in markets to allow free market forces to find an equilibrium. Why then is the US govt bailing out hailing financial firms left center and right?!

Maishinski said...
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Maishinski said...
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Maishinski said...

Couldnt agree more...

Maishinski said...

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Double Standards and doublespeak.
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I am so confused right now.

- Invading Iraq is "liberation"; invading Georgia is "agression".

- Remember Katrina? According to media reports, black people "LOOTED shops for food", whereas white people in the same neighborhood went to "FIND food in abandoned shops".

- Using terror to fight terror: Guantanamo bay vs respect for human rights. Bombing other countries = “war on terror”.

- "collateral damage": best used when your army blunders and murders hundreds of innocent people.

- Aug 7 Bomb blast - Nairobi: media allegedly reported that Kenyan rescuers removing debris at the site were "STEALING", whereas the foreign Marines who came late (many hours after the Israeli soldiers had worked side by side with Africans to do all the crucial rescue work), were digging through rubble to "SEARCH AND RESCUE".

- Aug 7 Bomb blast - Nairobi: Allegedly, foreign Marines blocked access to the site - and assigned priority to rescuing foreigners. A national outrage followed and a senior foreign official was sent to Kenya to "clean things up".

- There are many allegations of covert operations by some notorious governments - Financing and training insurgents, rebels and opposition parties to topple governments that don't tow the line. Google it. The sad fact is that the very perpetrators of global deception and misery brand themselves as champions of truth and democracy.

Quite confusing, isn’t it?

MainaT said...

Guys, you do have a point.
Something is very rotten at the heart of capitalism when one of its main pillars starts collapsing.