Hedge Fund Bail Outs - Essay Example

1. Should public money be used to bail out private financial s? Yes and no. A. Give the “positive” arguments for….The positive argument for public money being used to bail out private financial institutions are if private financial institutions fail the economy would be worse off than it is now. This would be the result of little or no credit being extended to the American public. B. Give the “normative” arguments against….. The normative argument for public money being used to bail out private financial institutions is that of being unfair to normal American homeowners forced to pay for their mistakes with their homes.

Public money is not being used to help Americans for losing their homes. 2. What is “Moral Hazard?” How does Moral Hazard relate to this current issue? A Moral Hazard is the theory that when people know that they will be bailed out are less cautious. Moral Hazard relates to this issue because the financial institutions know if they get into major trouble, the government will use public funds to bail them out. The recent Bear Stearns brokered bail out from the Federal Reserve Bank of up to 30 billion dollars of public money in order that JPMorgan Chase may purchase the beleaguered investment bank is an example of Moral Hazard.

If an American small business owner or homeowner fails on a loan due to bad business or money management, they lose their collateral. Bear Stearns received 30 billion dollars to make their business more attractive for purchase. That is a Moral Hazard.3. If one is a “True Believer” in the market mechanism does one insist on allowing all firms the ability to fail? Yes. If all firms are allowed to fail, the market mechanism is fulfilled. Market mechanism is where buyers and sellers have an open and understood system of value and time trade offs to produce the best distribution of goods and services.

Market mechanism assumes perfect competition. If failure is not allowed, than one can not be a “True Believer” in market mechanism. 4. How does firm “failure” lead to “efficiency?” A firm’s failure leads to efficiency through the opposite attitude of Moral Hazard. If a firm’s executives realized that they will not be bailed out if their company goes bankrupt or fails, they would be more cautious. Executives that realize they will not only lose their jobs, but will not receive big severance checks, might think twice about gambling with their company’s future.

This would result in firms, financial and others, to operate efficiently as possible. Competition to be efficient would bloom. Instead of quick schemes to make money now, long term deals would be pursued. Deals would be made soundly, instead of executives taking risks to receive more incentives. 5. What do you think? Should public money be used to bail out private financial institutions? No and yes. If the common home loaner is forced to lose their home, private financial institutions on the brink of bankruptcy or failure should lose their assets.

When a private financial institution is broken up, executive ‘perks’ and salaries should be examined for any wrongdoing. The whole reason executives receive perks and high salaries are to keep their institutions afloat and lucrative. If the executives do not do their jobs, then they do not deserve perks or high salaries. If public money is used to bail out private financial institutions, all executives should be fired; they did not do their jobs. New management should be a condition of public bail out.

Laws restricting excessive executive privileges should also be put into place. Stricter laws about the whole financial industries should also be implemented allowing higher financial institution responsibility.