Who’s Next?

Who’s Next?

If  you are losing track of the number of  times the U.S. Government has offered to be the lender of last resort to a sinking enterprise recently, you will appreciate a great editorial from today's Wall Street Journal that highlights an alarming feature of the current economic scene: the profusion of U.S. government funded bailouts, rescues, and backstops. As the article points out, the housing market collapse and credit crisis have produced a flurry of interventions ranging from facilitating the July Bear Stearns takeover (up to $29 billion) to the looming rescue of mortgage giants Fannie Mae and Freddie Mac (estimated at up to $100 billion). Now, with the spike in gas prices decimating demand for SUVs and trucks, discussions of providing federal support to the Big Three automakers have popped up.

Each of these actions potentially leaves the taxpayer on the hook for massive sums. Perhaps the most important issue of all is moral hazard. Since the ability to transfer losses to some other entity will likely change the way a company (or industry) manages its risk, it leaves the door open for poor decision-making that would not otherwise occur in the absence of an open line of credit–in this case the U.S. Treasury.

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