The first “recorded” financial crisis in the U.S. occurred in 1792. That’s just five years after the Constitution was adopted. Seems the crisis happened when Alexander Hamilton decided to establish a quasi-private Bank of the United States. Speculators went wild, and the size of this bank led to some, shall we say, dodgy lending. It became overleveraged.
So, it was bailed out. The first time the axiom “too big to fail,” that is moral hazard, reared its ugly head.
Yes, the same moral hazard phrase that has been bandied about by politicians, pundits and just about anybody else who has an opinion about the recent, though, I believe, not receded, financial crisis.
Is it just me, but are there more deer about this year than normal?
On the Fort Lewis College campus, at dinner time, there are more deer wandering around than students. My drive home has come to resemble a slalom course.
Why are there so many deer?
Deer’s natural predators include wolves, mountain lions, alligators, jaguars (don’t think we have to worry about the last two, but you never know) and humans have been relatively successful at removing these predators. For a number of reasons.
Our desire to live in the great outdoors surrounded by trees and solitude requires us to move further and further into natural habitats, usually inhabited by deer, bear, mountain lions and wolves.
We take on more risk. Risk that our houses will be invaded by bears and raccoons – apparently a bigger problem than I imagined given the growth of raccoon-proof garbage bins. Risk that we will lose our pets to mountain lions.
We start act as if the risk doesn’t exist: moral hazard.
So the deer wander into our yards. Leap lugubriously over fences into roads. Deer on campus hardly bat an eye when I walk up to the entrance to my building. They have become effectively domesticated.
Now they are the risk-takers. Risk that I am not so benign after all. Risk they won’t be hit by a car, etc. Yes, moral hazard.
So now we, protecting ourselves and our pets from the likes of lions and alligators, are more likely to be killed by deer, indirectly, than by the predators we are endeavoring to protect ourselves from.
Gotta love the law of unintended consequences.
Now, where was I? Ah, yes, the first bank bailout in U.S. history.
Hamilton took a lesson from a previous financial crisis that happened in France about 70 years earlier, and the plan worked. But that bailout also set the stage for the relationship between the state and financial intermediaries to this day.
Most economists believe that allowing banks to fail, for paying for their own mistakes, is a good thing, let the market weed out the weak.
However, those same economists also recognize that failure to help banks also would be far more costly in the short and longer runs. It’s a bitter pill.
There sure are a lot of deer.
firstname.lastname@example.org. Robert “Tino” Sonora is an associate professor of economics at Fort Lewis College and director of the Office of Business and Economic Research at Fort Lewis College.