Recently by Robert Wenzel: The Fed Explains Why It Is Great
Japanese Prime Minister Naoto Kan on Friday said that it will be necessary for the Japanese government to provide aid to Tokyo Electric and Power Company. TEPCO is the owner of the failed nuclear power plant as Fukushima.
Such a bailout will protect those who financed the power plant including international bankers, and depending on the structure of any bailout, most likely will also result in funding for homeowners near the plant and quite possibly help TEPCO shareholders.
They should all be allowed to sink.
It is simply Japan’s version of too big to fail, if Japan attempts any bailout. Those banks who financed TEPCO’s Fukushima power plant misscalculated the risks, as did TEPCO shareholders and those who chose to live near the plant. In a free market, they would all suffer heavy losses, but in the current world of government as security blank, where huge losses are absorbed by the government (that is the taxpayers), they are unlikely to suffer losses.
The lesson will continue to grow in industrialized countries throughout the world that grand risks can be taken and, if they fail in spectacular fashion, the government will step in to socialize the losses. It is creating a world where major risks will not be calculated into an equation. Projects will become more risky in the outlier world of huge projects. It will be moral hazard to the 10th degree.
Rather than providing a security blanket, the Japanese government should allow the losses too occur. It will teach a lesson to all grand risk takers that they need to consider the risks of their projects carefully. It will bring risk taking back in line with real risks, as opposed to a world where the grand risk is ignored. On major projects of any kind, the more risk evaluators the better. Governments by coming to the rescue on such projects merely cut down on the number of those evaluating and considering the great risks. It should be the opposite way around, the greater the project, the more important it is for those who face losses from such a project to know that they will indeed suffer the losses. Those who choose to take part in a grand risk should suffer the losses of any failures. It is the only way to get people to pay attention to risk. Otherwise, spectacular unchecked risks will continue to grow globally.
Reprinted with permission from Economic Policy Journal.