I am a Christian, raised as a Southern Baptist. But I am not a particularly religious person. What I mean by that is that in the last two decades I have been to church twice. Part of the reason is because there is quite a scarcity of Southern Baptist churches in at least the part of New York State where I live and I haven’t found a church locally that I really like. I have from time to time substituted the lack of church services to my liking with self-study and Christian television of various flavors.
When some catastrophic happening occurs, like the Great Recession, some people turn bitter and lose their religion. For me, it was the opposite. That was when I rekindled by faith because there was no way I could have made it through those very trying years without it. One time while I had been doing some self-study, I stumbled on a scripture that said something like, as in my title, when it rains, it rains on everyone. And it meant that big and bad things happen and they happen to everyone deserving or not.
I thought of this when I saw a discussion about moral hazard. And I’m not certain that I can articulate this in comprehensible way, but regardless of what one thinks about bankers and wild investors, they did get rained on too. Taking on moral hazard for the bankers and investors is like pissing into the wind; and if they do it in a big way, the splatter gets all over the place.
But the Great Recession wasn’t about bankers and wild investors, at least not the length and severity of it. Instead of ensuring that the appropriate losses were taken, we had a central bank that was focused only on keeping the banks afloat, sterilizing the required lending as monetary policy was naturally tightening which ensured everyone else got the splatter. It was the central bank engaging in moral hazard that ultimately rained on everyone else.
Since I was unemployed during the thick of the crash, I had plenty of time to actually watch Bernanke testify to congressional committees on dealing with the crisis. His attitude was basically one of disgust, being rather shocked at the amount of leverage many of the non-regulated institutions had. He wanted them to take losses. But I am not entirely sure how that loss taking was never translated into tightening monetary policy, at least in his mind. Big debt causes big problems in a disinflation. Really, I’ve stopped trying to figure out why he didn’t decide to protect the broader economy by doing QE much earlier. The losses still would have been taken by the mortgage people who should have lost. Instead, he and his colleagues at the Fed let it rain on everyone when it made it rain on the wicked.