NO FREE LUNCHES, BEWARE MORAL HAZARD

The federal government is dishing out trillions in stimulus dollars. So much money is practically impossible to imagine.

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But these debts belong to us all. We need to think carefully about how this money is being utilized.

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I’m not saying this spending isn’t needed. It’s quite possible that we need every dime to protect Americans from disease and avert a new great depression. But I also wonder how effective it will be in reality.}

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Are leaders spending these incredible sums with best practices, proper oversight, and the good of the nation in mind? Are the well-connected more advantaged? Is some being used as CYA against future criticism? Are we applying the lessons learned from the last financial crisis just over 10 years ago?

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Many companies, like airlines, operate vital infrastructure, and we don’t want to let those systems collapse. But their physical assets, like planes, and their employees can continue to operate even if bankruptcy (a legal mechanism) occurs. Big bailouts being discussed in some industries are effectively to rescue for equity holders, who historically earned solid RoI for investment because of the level of risk they were taking.

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Same story for municipalities- i.e. some states in the USA – that have historically run large deficits and owe billions of dollars in unfunded pension schemes.

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Government clearly has a role to play in lessening the blow of this crisis and helping our fellow citizens. We need to keep liquidity in our financial markets, so they can continue to function. We need to avert the destruction of good companies that were perfectly sound until this global catastrophe hit. We don’t want unemployment to become crippling.

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But we must also beware of moral hazard. When government protects risk-takers from the consequences of their risks, then we create an unfair system that encourages reckless behavior and undermines trust.

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My view is this: stimulus funds should be viewed as an investment in America’s future, and that investment should have a strong RoI for Uncle Sam, and therefore American citizens.  It could be equity or senior debt, but companies need to give something back in exchange. No free, taxpayer-funded lunches.

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