•Saubhik Chakrabarti: What is your view on moral hazard in the context of a series of bailouts in the US?

The whole issue about privatisation of profit and socialisation of cost—people often say the taxpayers have picked up the bill—is a very loose term. When the whole thing is unfolded you often find that more often than not, the taxpayers have actually made a profit. If you remember there was a huge argument about the Hong Kong monetary authority intervening in the stock market. As a result of the intervention, which theoretically put the taxpayer at risk, they are sitting on a profit of $10.5 billion.

Sometimes providing liquidity does not involve a fiscal cost. This continuous confusion that because the authorities are involved somewhere the taxpayers are paying the bill is just a fundamentally misleading argument.

Consider the consequences if Fannie & Freddie had failed. What if the entire guarantee mechanism of a $6 trillion mortgage market had suddenly got zero credibility and credit rating behind it? What kind of bill would the taxpayer have had to pay then? It’s the looseness of thinking which does not consider the counter factual that leads you to assume this lovely phrase—that these guys privatise profit when the going is good and now that the whole thing collapsed the cost is being socialised. Frankly, if you hadn’t done the rescue, the cost would have been socialised at a much higher level in a much more dangerous way.

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