Moral Hazard: Not Just for CEOs
Bob McTeer, an economist writing in the New York Times’ “Economixx” blog, has an interesting post today about “moral hazard” as it relates to the potential bailout deal. The post is good if you want a concise definition of what moral hazard is, but I think he misses the point. The reason the term has entered the debate is not the reason he believe. First, though, his definition.
The key reason to avoid moral hazard is to prevent rewarding those people who engage in overly risky behavior or make bad decisions, so that future decision makers won’t repeat them in the future.
I think we can all agree that we don’t want to reinforce bad behavior. McTee is right to note that corporate CEOs and board members are not getting off scot-free. They are losing a lot of money and their jobs. Moreover, average citizens – the stockholders of these companies – are also feeling the pain as their stock values drop.
The people that McTee fails to mention altogether, and the ones who conservatives are usually talking about when they talk about moral hazard, are the ones who are sitting on mortgages they can’t pay right now. I’d group the largest number of them into two groups. The first group consist of those who signed mortgages predicated on the assumption that the value of that property would continue to rise. The second group would include people who got way more mortgage then they could afford. The risk of moral hazard in those cases is high because only government intervention at this point is going to allow them to keep their houses. If we allow them, though this bailout, to escape the consequences of their bad decision, what is to prevent someone else from demanding that government do the same?
They’ll have a point. Moral hazard is an extremely slippery slope because if you let one group of people skate and not another, then you’ve set yourself up for accusations of capricousness, dishonesty, or bias if you don’t give another group a pass on their bad behavior, too.
The problem in this crisis is not that corporations are going to run afoul of moral hazard. They’re going to pay their price. We individuals, though, have to pay ours as well and we can’t ignore just how badly things can go if we let the people who hold bad mortgages just get by with what they by all rights should not have.
Of course, that brings up more than one tough question. But those questions, I think, are subjects for other posts. Right now, it’s enough to note that moral hazard isn’t just for big shot CEO types and I think that a post from McTee that addresses the moral hazard argument as it applies to individual mortgage holders would be an interesting read.
Other Posts of Interest:
- More Mortgage Meltdown Basics
- The Roots of the Subprime Mortgage Mess Have Clinton All Over Them
- Morgage Meltdown Basics
Category: The Economy and Your Money
