Bailout 10: Moral Hazard

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Alternate plans and moral hazard.
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[@poiuwnwang7109]

I have wathed the entire bailout series, it's great! Sal teaches by story telling, which makes it 1) more fun to learn the stuff, 2) more realistic, and 3) it gives some degree of intuition

[@DokterKattenbakvulling]

the title of this video is like the title of a video game

[@khanacademy]

Savers are not effected if the banks go under. Their deposits are insured (and I think it is good that they are). Also, I am talking generally about commercial and *investment* banks (like Goldman and Morgan Stanley which, until recently, were not commercial banks and therefore did not take traditional deposits).

[@khanacademy]

Your argument would be true for most mortgage back securities. Remember, CDO are MBS's sliced up so many of these CDOs may be the riskier tranches (or buckets) that get wiped out only if you have a 10% loss on the underlying assets (or collateral)

[@hipbas]

Brilliant.I've learned so much. Thankyou. Best video's on youtube regarding this topic. Keep up the gr8 work.

[@Slaughtermaster111]

Especially given the fact that there is only a limited timeframe for this to happen before the real economy starts to get hurt

[@RvNYC]

Your point is brilliant!. The government creates an economic rescue fund dedicated solely for the lending of capital to the "real" world businesses. The let the cards fall where they may. Why is this NOT being looked at!

[@guitarzilla]

Out of all the videos I have watched on your channel, this one is the most provocative because it addresses the implications of what the government is attempting to do and leaves an impression that the bailout is everything against the interest of the public. This is disconcerting information considering that the government is supposed to be a public service.

[@sayyedsalman]

Great Work Great Teacher. Keep it up. i am so proud that we have some thing in common Thas the Name...lol

[@Gimipork]

Thank you for explaining this to us Sal, it's very helpful. You should be the next economic adviser :)

[@MrSupernova111]

"Look at these idiots. They took all this risk and the government bailed them out." lol effing bankers! lol

[@BR-vp2dz]

“You’re making these bubbles more likely to happen in the future.” Its mid 2022 and he could not have been more right.

[@painswitch]

IMO the last point made about lending to main street makes the most sense, however decideing who on mainstreet needs the money the most would be a extremely time consuming at best. In a fast falling economy the government has chosen the quickest (maybe not the best) route. They could be very desperate because they see a collapse somewhere we dont.

[@Prophetess7]

Thank you Sir. Great video

[@joulian0720]

Man these are freaking great!!!!!

[@ninjapie]

AFAIK, if a company goes bankrupt, preferred share holders get dibs first, when it comes to paying out the money to share holders (so, still *after* the debt holders get their money). Also, they often get a higher divident pay out or somesuch.

[@rosihantu1]

Excellent. Thank you.

[@TheMailprasad]

Mr. Khan, if you can make a video on Eurozone debt crisis or at least Greek debt crisis, it will be great. Thanks

[@RvNYC]

Yes that would work as well. The idea is to create or nurture a sound banking system untainted by toxic assets. I think Sal mentioned that possibily as well in his videos.

[@masakmerah]

IN KHAN WE TRUST!

[@sayyedsalman]

These Lectures on bailout are simply great and explanatory.. but i wonder What does Warren Buffet meant when he said that the derivatives Market is "Financial Weapon of Mass Destruction" does he Meant MBS/CDOs ?. and what is Credit default Swap? this word is also pretty common in CNBC or other business channel talk shows?

[@brco2003]

Direct loans will essentially turn the feds into a bank, at least until these banks come back in 5 or so years. The government can earn interest revenue and then can pass some tax cuts. This takes away all of the relevant moral hazard. This still keeps the economy running, supporting our mom and pop farmers, while rightfully penalizing Wall Street for taking huge risks. I don't see significant inflation coming out of this.

[@mintoo2cool]

you say let the back go belly up and let the government lend to the producers of goods and services money directly. but what about the people who have money with the banks. they should not get punished right? the share holders. yeah punish them. lenders to the bank yea. punish them. but what about the people who have money with the bank? i think thats one side of the moral hazard you did not discuss. i liked the way you explained the facts ... your opinions ... well i dont agree completely ...

[@RvNYC]

Same way a private bank does. In fact, a smart politician would hire the bankers whose institutions were NOT compromised by Toxic assets. The idea is that the goverment provide the cash to an found a new entity whose banking business is based on traditional banking standards. How it is used or misused will depend on us. We must be always be vigilant as the founding fathers warned. Actually I like what, Nicolas Taleb Nassim suggests. Create a two tier system, Banking and Risk taking entities.

[@beornborg7309]

great series

[@senglord]

this is the last and most logical extension of supply side economics. Stagflation was the end result of public works/ stimulation of demand. Of the two, stagflation is the lesser. In my opinion.

[@RvNYC]

MBS issued by SPV's I get this. The SPV collects the payments and pays these out as dividends to the Securities holder. Who holds the mortages. Are there say 1000 separate mortages locked away in a vault somewhere? Are the riskier tranches based directly on the risker subset of mortages in a larger pool?

[@Yourdeadmeat69]

Aside the wall street bad decision makers, what is forgotten is that America's 401K's, which are held by 70% of America ARE not separable. There is no moral hazard, if reregulation surfaces that defines and curtails, risk taking to professionals. These undertakings where the govt lends to private industry should not come without strings.

[@yogiudo]

I would like to see a video which explains what might happen if they print the money out of thin air to do the bail-out, and what the effect on the tax payer etc might be. The relationship to the T-Bill.. etc

[@khanacademy]

I agree with you. I don't think direct loans would be a good idea either. I just think that it would have just as good chance of working and at least it wouldn't be as "morally hazardous". Frankly, I don't think we can legislative ourselves out of this.

[@AdamSmith102938]

You did a very nice job of explaining the effects of the bailout. I'll add a couple. One, let's look at the providers of the capital: the taxpayers. A bailout forces the taxpayers to transfer their wealth to the presumptive risk takers. Two, I can't believe all the gov't people are idiots because your points are well known by all economists, including Bernanke. So, one is left to think this is a knowing attempt to take over (socialize) an economic sector. It's not just misguided.

[@smallbighorn]

wrong, the government is bailing out the banks and not main street because bailing out the banks is cheeper for the government then bailing out main street. Furthermore, letting the banks fail would cause a total collapse of the hedge fund industry.

[@ananiasacts]

I still think raising the mortgage interest tax credit would have been a better way to artificially prop up the housing market for long enough to allow the banks to unwind their exposure without artificially depressing prices by rapidly de-leveraging the banks and grossly exacerbating the real underlying problem.

[@Waranle]

Thank youuuuuuuuuuuuuu KHAN

[@tnguyen603]

next video please?? and these CDO's that you speak of... what happens if it is worth 0$, and those people that needs to pay mortgage and these companies go bankrupt?? who collects the monthly payment and what happens to those who cannot afford them?

[@Slaughtermaster111]

Very well explained and informational. I want you to congratulate on your series. But I have to disagree with you in one point. How do you want to lend money directly to the whole real economy. Banks are not just holding mortgages or corporate loans but also credit card loans,student loans and I don´t know how many other type of loans etc. The administration necessary to provide 700 bill. to the real economy without banks monitoring etc. is huge.

[@lazmedina]

I always knew you were a genious, now you just proven it again. If only half of our American population could have 1/10 of 1% of your brain. The politicians would need for their IQ to be raised to the minimum human operational level.

[@ambrosiathe1]

Well, yes, but the mum and dad savers who put their money in bank were the inadvertent lenders; meaning the big banks and other actors in the finance industry (ie, real estate) gambled with someone else's money

[@anhdang400]

Whenever we talk about MONEY, GREED appears.

[@etf42]

so does fear

[@pongman]

I disagree. Someone gave out the loans and as far as I can tell the only people who gave out these unsecured loans were the financial institutions. The reason they gave them out was because they saw this pot of gold at the end of the rainbow. It was a feeding frenzy that went unabated and unregulated.

[@ozziindaus]

No, No, No, that won't work. How would lending directly to the farmer, factory builder etc pay back the foriegn creditors? I think this is the real sinister plan. Good luck getting a loan in future. Good luck even going into foreclosure in future. I bet there will be a law passed very soon to prevent those upside down walking away from their mortgage. How will this be done? We'll the IRS arm of the FED will simply tack your mortgage onto your income taxes.

[@rakeshgodara9212]

Artificial demand would only leave the crisis for the time to come. The crisis would still be there, because the artificial demand create market price will eventually fade out and by this time more derivatives and investments, of the kind of CDOs, would be there. Hence the crisis would be amplified.

[@ananiasacts]

"hire the bankers whose institutions were NOT compromised by Toxic assets" why not just put the equity the government wants to create directly in those institutions?

[@Chromatype]

Sal, you are doing a great job...figure out a way to increase your exposure! they have these guitar wannabee's with 6 million hits and you are actually presenting video with substance....this country has a severe disconnect between education/awareness and real-world preparation. -So Say We All

[@ananiasacts]

But how does the government run a bank? Wouldn't it most likely be used for political purposes?

[@brco2003]

These government banks we be sold down the line when the economy picks up, and the government will make some profit for the taxpayers. This newly privatized bank will have a pristine balance sheet since they did not take huge risks when loaning out. Foreigners will be happy to give loans to these banks.

[@mongobobo]

By Main Street people mean the real economy. However, a fair question is...Do we have a real economy in the United States of America?

[@jmuench420]

@mintoo2cool The FDIC takes care of people the bank's account holders, up to $250,000 per account.

[@shiv86]

sal thanks for the videos ....Sarah Palin should take some time out of her campaign to watch them cause shes under the impression that the bailout some how relates to health care /watch?v=0PwQdzpMdEI&feature=related

[@ozziindaus]

I was being sarcastic with the first two sentences

[@kirollosgirgis5446]

lmaoooo, and here we go again

[@ladicius]

has anyone shown this to obama? i'm not sure he's aware of what's going on...

[@pongman]

There is no such thing as a blind trust unless George Bush, Paulson and Bernanke gave me their money to hold and let me play with it. lol

[@drzakir123]

@khanacademy bottom line is interest[usury] is the root cause of this problem which is rightly ban in all the major religion and very specifically in islam.i think the system is evil from its core.may god bless you

[@pongman]

lol