Rewarding the Risk Averse

I just had a chance to read my most recent edition of ERN Economics of Networks eJournal Vol. 3 No. 107, 08/12/2011.  In it, I found Professor Olufunmilayo Arewa's paper, Risky Business: The Credit Crisis and Failure, available on SSRN here.  I have just started looking through it, but the following paragraph caught my eye (footnotes omitted):

Rhetorically bashing financial institutions has become common place among the media, public officials, regulatory agencies and the general public. A focus on blaming financial institutions, however, deflects attention from other failures that contributed to the credit crisis. Further, few discussions focus to a sufficient extent on dealing with the industry and regulatory failures that led to the credit crisis. The credit crisis aftermath could be seen as actually rewarding those most responsible for the failure to manage or regulate risky financial market business activities. Through programs such as the Troubled Asset Relief Program (TARP) and the Public-Private Investment Program (PPIP), which are government initiatives to address problems resulting from the presence of illiquid and troubled assets on financial institutions balance sheets, industry participants received government bailouts that permitted them to avoid assuming the full risk of their activities. The bailouts have thus rewarded risk management failures by averting firm failure, which presents the same significant moral hazard implications that spawned the current financial crisis in the first place.

I'm inclined to agree.  In 2008, I argued that, "without any measures to mitigate the harm and cost of government intervention, all bailouts place government (meaning taxpayers) in the role of fee-free insurer for the largest companies."  I look forward to reading more of Professor Arewa's article.

--JPF