There are many reasons to not have banks as big as they are now. In an indirect way, avoiding a Moral Hazard may be one of them.Higgenbotham wrote:Moral Hazard as I've seen it defined means "too big to fail" financial institutions can run their businesses with too much risk and still be OK if it doesn't work out because they will be bailed out.Reality Check wrote:I would respectfully submit that what you are describing is "Moral Hazard"; One of the later phases of Moral Hazard.
But while there are specific actions you can take to avoid Moral Hazard, the size of the Bank is not the moral hazard.
Take a small private bank.
A private bank is created when investors, usually a small group of very wealthy investors, put up their own money, or capital, and then start performing banking operations.
They borrow money from some people and loan it to others.
The amounts borrowed and the amount loaned should be equal and they make money on the difference in interest rates between what they earn on their loans and what they pay their creditors. Over simplified, but accurate enough for these purpose.
The capitalization of the bank is the amount of the investors own money on deposit with the bank, minus any losses that have not yet been realized, all divided by the total amount of loans they have outstanding. This is normally expressed as a percentage such as three percent, or ten percent or fifteen percent.
In the event the bank loses money, the owners lose all their money first and then the people they borrowed from start losing money.
Historically bankers who lose other peoples money are no longer bankers and often pay other penalties, like execution, with or without torture first.
A Moral Hazard is the risk of creating Moral Monsters and leaving them in charge of of other peoples money.
Not only are they encouraged to do it again, but all the other bankers, who have not done it yet, are encouraged to do it as well.
One could think of a worse way to create a moral hazard. That would be to reward those who lost money by giving them replacement money ( re-capitalization with other peoples money ) and giving them exclusive franchises to make more money without taking any risk, and to guarantee them against all future loses, and to pay them huge bonuses as well. The U.S. Federal Government, and the Federal Reserve, were allowing all these things to happen as part of the "fix" to the financial crisis, and all the while some people were yelling "think of the Moral Hazard" of your actions
The "Moral Hazard" of those actions was the risk of creating "Moral Monsters" ( H's bandits ) and then leaving them in charge of Billions or even Trillions of other peoples money.
One often hears excuses like the "bank was too big to fail" so we were unable to fix the problem, or we cannot remove the bank employees responsible because they have not been convicted of breaking any law.
The following two facts prove such excuses false:
1. What just happened at Barclay's.
2. The following testimony to Congress.
http://www.youtube.com/watch?v=J8CqaHTy ... creen&NR=1
In both cases there was a "blood bath" and people not even convicted of any crime, most, if not all, have probably not even been formally charged with any crime, yet they were purged from the banks overnight. In the case of Barclay's those purged included the Chairman of the Board, the CEO, the COO, and multiple other officers of the bank. And these purged individuals did far less than those responsible for the 2007-2009 financial meltdown.