LOS ANGELES (KTLA) — “Moral hazard” is a well-established economic concept that basically says if there are no consequences for bad corporate behavior, there’s no incentive for companies to change their ways.
That was the stink that followed the bailout of banks after the 2008 financial crisis. Once businesses become “too big to fail,” they can pretty much do as they please, engaging in the same risky behavior.
While the collapse of Silicon Valley and Signature banks is nowhere close to the severity of the earlier mess, it once again places us in the unfortunate position of the government stepping in to keep the peace and make depositors whole.
It could be argued that this outcome was all but assured in 2018 after then-President Donald Trump signed into law a bipartisan bill deregulating financial firms. Trump called this “a great day for America.”
It wasn’t.
What the 2018 regulatory rollback did was relieve financial firms of much of the oversight imposed after the 2008 meltdown, including closer monitoring to ensure banks don’t overextend themselves with risky decisions.
That’s precisely what Silicon Valley and Signature banks did when they courted tech companies that deposited gobs of money — way more than the $250,000 threshold for insured deposits.
This left both institutions overexposed when depositors started pulling funds from the banks, making billions of dollars vulnerable to loss.
Would the regulations passed after 2008 have prevented that? Maybe, maybe not.
But they would have increased the likelihood that someone in authority would have spotted the problem before things grew out of hand.
OK, back to moral hazard.
Nobody wants businesses to fail. However, it’s crucial that business leaders know there are repercussions for risky behavior.
Every time we bail out imperiled companies — which is what we’re doing now, regardless of what the president says — we send a message to CEOs that they can dig themselves into a hole and the government will show up with a ladder.
It’s tricky (as Run-DMC might put it).
One thing we can say with confidence, though: The banking industry has shown itself to be incapable of learning lessons.
That’s moral hazard. And that’s a problem.