Moral hazard -- and how taxpayers get screwed

On the subject of "moral hazard" noted in yesterday's DR, one of the major figures in establishment finance is weighing in… and there's no doubt on which side of the issue Clinton Treasury Secretary Larry Summers comes down:

The world has at least as much to fear from a moral hazard fundamentalism that precludes actions that would enhance confidence and stability as it does from moral hazard itself.

Translation:  Wall Street big shots are entitled to their bailout, and anyone who says otherwise is a crank. 

Cranks, to the mind of Summers, and Ben Bernanke, and Hank Paulson, are the types who say things like this:

I think we have a very narrow understanding about what moral hazard really is. Because I think moral hazard begins at the very moment that we create artificially low interest rates which we constantly do. And this is the reason people make mistakes. It isn’t because human nature causes us to make all these mistakes, but there is a normal reaction when interest rates are low that there will be overinvestment and malinvestment, excessive debt, and then there are consequences from this. My question is going to be around the subject of how can it ever be morally justifiable to deliberately depreciate the value of our currency?

Bernanke had no coherent answer to that question from Rep. Paul this week, nor does Summers address the question:  The words "dollar" and "currency" appear nowhere in his column, and certainly not "devaluation."  All that matters to him is that Wall Street big shots are entitled to their bailout.  And just in case there was any misunderstanding on that point, Summers wraps up his piece thus:

[P]rudent central banks will make judgments during financial crises not on the basis of “avoiding moral hazard” but rather by asking themselves three questions.

First, are there substantial contagion effects? Second, is the problem a liquidity problem where a contribution to stability can be provided with high probability or does it involve problems of solvency? Third, is it reasonable to expect that the action in question will not impose costs on taxpayers? If the answers to all three questions are affirmative, there is a strong case for public action.

Let's see if I have this right… "Public action" (lovely euphemism for a bailout) is warranted if it does not "impose costs on taxpayers."  But if, in trashing the dollar, it imposes costs on ordinary people who pay more for food, clothing, shelter and transportation… well, that's just peachy keen.  Never mind that most of those people are also taxpayers, so it's simply a matter of whether they get screwed in an obvious way, or a less-obvious way.

I can't decide whether Summers is being disingenuous or ignorant.  If it's the latter, he should stick to expressing his opinions on matters where he's more qualified to speak out — like whether women can ever equal men's achievements in the physical sciences.

The Daily Reckoning