Subprime Series 4 of 5 - Government bailouts and Moral hazards

If you know your Lamborgini car insurer will gladly replace a new car for you FOR FREE at the most slight scratch, will you drive properly? If you know that your bf/gf will definitely forgive you (without incurring any future vengeance from him/her) if you cheat on him/her, will you still cheat?

So i assume my dear readers to be rational up to this point and say yes to both questions. If not, you can scroll to the top right hand corner, search for this small "x" button and close this webpage.

Yes, though my examples are pretty extreme, but they are examples for moral hazards. It simply means risky behaviours engaged by the more informed ( the driver, cheater) who had more information on the current situatuon. And yes, this is what is exactly happening to the US banks now. MH problems.

Put yourself into the shoe of a chief banker of any cat/dog US bank: I know my dai gor won't allow me go bankrupt. I am able to make more (risky?) loans and earn more $$.

But why arent US banks arent allowed to fail in the first place? They are simply TOO BIG TO FAIL.
1) Being the world's pioneer in the financial sector, these banks have dealings with other banks throughout the world. A failure in any of them simply means a failure to these dealings and will bring catastrophic reaction to the others. One perfect example is the Iceland banks: they held too many of these failed dealings with US banks, including the LM bros and hence, they went bankrupt. And these Ireland banks that went bankrupt were national banks! So effectively, Iceland went bankrupt and had to borrow money from the dai gor ( International Monetary Fund )

2) A bank failure had internal repercutions as well. Long term loans to potential comapnies will be wiped out, killing the companies immediately. However, companies are inter-related to each other as in they have business dealings with each other! So, defaults ( no money to pay) are expected to escalate and companies will fall like london bridge. Totally undesirable.

3) As US banks tend to hire alot of people, a bank failure tends to cause massive unemployments. Unemployments generally mean recession coming by as people get laid off, spend less, indirectly kill other businesses via less spending, more people laid off due to poor business ( vicious downward spiral )

So Economics 101 told us bank failures are generally undesirable. But what about MH problem discussed above? If government always have to bailout ( inject $$ to save )banks, who is gonna fund the govt for the bailouts? Government dun grow money trees in their courtyard. The funding gona come from their citizens via increase tax paying!

So I believe everyone knows that 700b is being pledged by the US govt to fight this recession. But this amount of $$ doesnt come free! It comes from tax-payers $$! So why are these poor citizens footing the enomous bills of these wall streeters when they are earning soooo much already? An article revealed that a yr end bonus of an average wall streeter is around 200,000 USD! So are they gona use the tax-paper $$ to fund all these fat bonuses?

Its even more pek chek when you see XXX banks in US are giving fat bonuses to their CEOs, staffs even their banks were partially bailout by the US govt. But what can the US govt do? Sack the CEOs? Limit their bonus? There are 1million and 1 ways for these private bankers to cheat at the expense of tax payers for godsake.

Even if you throw 1 million brightest economists into such a situation, they can never solve the MH problems that plagued US. Over regulate the US banks and you risk killing off future financial innovations and let free market fail. Dont regulate and you face MH problems which are socially undesirable. And you can expect these scenarios to take place somewhere else, as its a MORAL problem.

What an irony, isnt it?