Hazard in BANKRUPTCY in the Insurance Industry ?
May this Kapas Pirate further educate the people on existing financial crisis facing the World i.e when the Real Estate bubble bursts, as happening right now everywhere especially in the USA. Those that borrowed to finance their real estate venture or adventures could now NOT repay their loans.
Bankruptcy now become widespread !!!!!!,,,in almost every corners of the World.
In standard market economics, if a lender makes a bad loan then righfully will have to face the consequences. Upon declared as a bankrupt or go into bankruptcy, the country's law on bankruptcy shall be applied.
What is happening now in America, the US Government is bailing out the Institutions/Companies that should rightfully declare itself into bankruptcy !. Pls note; Any creditors, anticipating an governmental bailout, would weaken its incentives to ensure that borrowers will be able to repay !.
This is an infamous moral hazard problem well known in the Insurance Industry and unfortunately now, in economics !. Its a fact that having insurance reduces the incentive to take care, to be extra prudent. A bailout in the event of a finencial crisis is like "free" insurance.
As such, if you are a lender, you take less care in screening your applicants, cas. you know you will be bailout if the loans go sour.
I pray that this message be noted by all and that our Malaysian Government shall not follow the same road !!!!!!!.
Pirate King Kapas Island.
