Sunday, September 28, 2008
Tuesday, September 16, 2008
In economics and ethical theory, the term moral hazard may be used for any situation where a person or organization does not bear the full adverse consequences of its actions.
Rescue operations carried out by governments, central banks, or consortiums of financial institutions can encourage risky lending, if lenders know that in case of serious problems they will not have to take losses. Similarly, if governments know that inability to pay creditors will lead to yet more loans (to prop up finances), then they are less likely to have sound financial policies.
By refusing to bailout Lehman, Fed signalled that it would longer allow moral hazard ( although it had been looking the other way and may have caused moral hazard itself when for example it brokered the Bear Sterns deal, or remember TBTF? anyone).
Wednesday, September 03, 2008
Tata Motors as stopped work in Singur in West Bengal, but its spokesperson said that there is still a small window open for Tata to return if normalcy returns. The $350 Mn that Tata Motors has put into the project is now a sunk cost. There are two scenarios for Tata to return.
- Farmers give in (of their own volition/ forced or coaxed by government/ community pressure from lure of future jobs etc)
- Or Tata strikes a deal with the farmers and gives additional payout to these farmers
The second scenario is appealing if the total payout would be lower than the amount Tata would have to invest in a new factory elsewhere + time costs. However this would not generally be good for other companies (and even for Tata) as this could potentially become a trend.
Even if the government acquired the land from the farmers at the prevailing market price, it is always a fraction of the land value after is handed over to the industry. The question is, at what price should the government acquire land. Is forced acquisition justified. What happens if one farmer does not want to give up his land and his land is smack in the middle of the land in question. What is your answer if the farmer in question is you and you little hut, that you call home, is smack in the center of it. What if farming is the only thing you have done your entire life. These are tough questions to answer if you are not the farmer.
And without fail, there are also rumors/reports of people close to the government owning a substantial stretch of land close to the land under question. What of these?
However, if you were a true believer in free markets, you would ask Tata to acquire land on their own at market rates and go fetch elsewhere even if one farmer refuses. The pseudo capitalists would let the government do their dirty in this case and use the free market argument to get government to slacken regulations elsewhere. What would you call such people? Ethical?