The Slippery Slope

Eric deCarbonnel, who started a blog, MarketSkeptics.com, in 2007, has written an insightful essay on "Ten Major Threats Facing the Dollar in 2009." One of the threats he discusses is the moral hazard effect of bailouts --

The true moral hazard of bailouts

Most commentators misunderstand the true moral hazard of bailouts. While bailouts might have an adverse effect on the future actions of individuals and businesses by encouraging risk taking, the real problem is their effects on future actions of the government. Specifically, each bailouts makes it harder to say no to the next bailout. This pressure to fund future bailouts is made far worse if those receiving bailout money are truly undeserving. After all, If the government is going to give $45 billion to Citigroup (one of the banks responsible for our current mess) and insure $306 billion of its riskiest assets, then how can it say no to bailing out the state of California or South Carolina?

This "me too" phenomenon will get much worse after the treasury market collapses, and the fed starts monetizing the treasuries that were sold to fund the current bailouts. If fed printed money to bailout the banks, why shouldn't it print more money to fund unemployment benefits? Politically speaking, you can't bailout the irresponsible and then let the responsible sink, which means congress isn't going to be saying no to a lot of the bailout requests this year. Unfortunately, these bailouts will become increasingly meaningless because, when you bail out everyone, you bail out no one as you destroy your currency.

While it is an unconventional use of the term, moral hazard, this is a clear and succinct statement of where we are heading that no one wants to face. Read the entire essay, which brings to bear the important factors that will influence the viability of the U.S. currency.