Custom Search

Sunday, September 2, 2007

Moral Hazard

Since I mentioned "socially conscious" I better define some terms thrown around Wall Street last week. "Moral hazard" and "puts." If the Fed cuts, (to the socially righteous bears-the arbiters of morality who wish a depression so they can profit at the misfortunes of the masses) the "Bernanke put" can lead to "moral hazard." What does this mean?

Moral hazard simply means that if the government bails out the institutions who gave loans to homeowners, then it will encourage these banks or institutions to make risky loans in the future. But look at how it is twisted. These pundits say we don't want to bail out homeowners. That's so rich. In other words, these homeowners, who didn't understand the mortgages or read the fine print, had an expectation of getting bailed out because they understood the financial implications of "moral hazard?" Think about that the next time these suits talk.

The "Greenspan put" now being ascribed to Bernanke, is also a lesson in semantics. If financial markets go down or seize up, should the Federal Reserve cut interest rates? Who cares if hedge funds and their hundred million dollar managers lose money. At least that's how the argument is presented. Shall we bail out them? That isn't the argument. If financial markets fall apart, does not that indicate there may be a reason for it? Shouldn't the central banker attempt to stem the possibility of a recession? Not if you're short! You want calamity, because calamity allows you to get paid! Now that's moral hazard!

Finally a "put" in the financial lexicon is used for protection. When the fed cuts rates, the problem is already known. If something is known on Wall Street, it already has been "discounted" into the stock price. The price of the asset has already fallen! There is no protection in this "put." The cutting of rates by the Fed, is an event after the fact, and the subsequent rise in stock prices, after the cuts, is the discounting of the future recovery, helped by the lower cost of money and the confidence of market players.

So the next time you hear the mention of the "Bernanke put" just put it this way: Does wearing a condom after a one-night stand provide you any protection? So how did "put" come about and "putting" on a condom provide protection?

Noah had three sons, Shem, Ham and Japheth and Ham's sons were Cush, Mizraim, Canaan, and Phut (Put). In Genesis 10, which describes the genealogies of Noah's sons, and his son's ancestors, there isn't a genealogy written for "Put." So the word "put" has evolved into "protection" in financial circles, and if you "put" on a condom, you'll be like Put-without a genealogy. But Put was still protected, it wasn't until Ezekiel 30:5 that his genealogy was known, but then under a different name, and a thousand years later! And if you don't like the etymology of "put" even though it's in black and white-I guess I have just one expression for you (and then you'll understand where that came from!)

"Put that in your pipe and smoke it!"

No comments :