… In fact, some people might even think that the government has a bit too much invested in the financial sector for, well, the financial sector’s own good. (For the effects of too much lovin’ on the financial sector, check out the current stock market.)
But if market discipline of the financial services industry in our capitalist system is weak, as demonstrated by Mssrs. Morgan and Siroh from the NY Fed above in connection with “Too Big to Fail” (and clearly visible in the subprime lending and mortgage-backed securities market over the last few years), it’s presumably because government policy-makers and their campaign donors want it that way. This was slyly highlighted by that great kidder himself, Alan Greenspan in his testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, on February 24, 2004:
However, the existence, or even the perception, of government backing undermines the effectiveness of market discipline.
Well, the originator of the Greenspan put should know, shouldn’t he? The topic of sloppy market discipline in a governmentally-driven sector like finance, often referred to as moral hazard, will be the topic of the next part of this series.