Monday, January 12, 2009

What Happened to Moral Hazard?

This week on Meet the Press, an contributor to Vanity Fair was one guest and she asked this very question. The concept is rather simple, it asks the question why America has become so content to spread the risk around?

That is, if we fundamentally think that people who make bad decisions should bear the consequences of those decisions, then we must consider bailouts which significantly reduce and/or eliminate those risks to be a problem. Moral hazard is the term applied to such an event.

Indeed, this is a fair question. Listening to broadcasts from the fall of 2008 would bring you to the same question when there was a workout for Bear Sterns. Some felt that any type of intervention, even in the form of a deal, was a bad idea. But others felt like this type of government assistance was a bad idea and was a moral hazard. This was a backlash which might have contributed to the U.S. government allowing Lehman to fail.

Regardless of the whys and the hows, the question is now: why has the average American changed his mind about moral hazard? The argument is that this people have realized that it was wrong to feel that way and that we need stimulus and bailouts. I personally am not so sure. I am not convinced that people have had a massive epiphany since the middle of 2008.

I would submit instead that people are simply more self-absorbed now. Before, during Bear, people felt like it was happening to those big, bad investors and that it would have no impact on them. Now, people have seen their retirement accounts chopped in half in the midst of a significant economic slowdown on a global scale where credit is painfully tight. In short, people are too worried about how to eat to be concerned about moral hazard. So, I think that the amount of pressure on government officials is weak now that Obama is about to take office.

This doesn't negate the principal concept though; moral hazard still exists if we shield people from the consequences of their actions. Indeed, the current bailout and stimulus packages are projected to be approaching 1.7 trillion dollars. This is money that America will likely be trying to repay for the next 50 years. Isn't that a hazard? And we haven't even talked about Social Security or Medicare. What do you think? Are we on the right track with the TARP, the stimulus or is it too dangerous to continue down this path?

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