Saturday, 25 June 2011

Variations on a moral hazard theme

Contrast these two scenarios:

A medical doctor says that a patient has a life threatening condition and that unless the person suffering receives immediate treatment there is no chance of recovery. The patient and his/her family and friends will almost invariably make all of the necessary arrangements to bring about the changes required.

A leading central banker- the BOE's Mervyn King as reported here - says that essentially the problems with EZ peripheral debt are based on insolvency and not liquidity. That, in effect, extending new credit to an insolvent sovereign will simply add to the magnitude of the default when it occurs. But rather than listen to a prudent central banker (sorry but that is almost an oxymoron), the ECB and EZ leaders stand ready to shovel another Eu 120 billion to add on to the approximately Eu 200 billion that the ECB will have to write off when Greece fails.

Moral of the story is hazardous (excuse the play on words) to the public purse.

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