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The news media will sometimes mention moral hazard in a
passing comment, as if it is not really a topic worthy of much
attention.
Nothing could be further from the truth.
Let's start with the textbook definition taken right from
wikipedia:
"Moral hazard is the prospect that a party insulated from
risk may behave differently from the way it would behave if it
were fully exposed to the risk. Moral hazard arises because an
individual or institution does not bear the full consequences of
its actions, and therefore has a tendency to act less carefully
than it otherwise would, leaving another party to bear some
responsibility for the consequences of those actions."
That ivory tower language doesn't really convey the massive
moral hazard problems the begun under the helm of Alan Greenspan
and continue to this day.
So I'd like to take a stab at putting it into proper
perspective.
Suppose your teenage child decides he'd like some extra
money and chooses to visit the local bank to make a withdrawal
of $10,000. Let's also suppose that he doesn't have an account
at this bank.
Instead he puts on a mask, puts his finger in his pocket so
it looks like he is holding a gun, and demands $10,000 from the
tellers. They give him the money and he runs.
The next day the police show up at you home and arrest him.
One hour later, he is back home. You ask how he could be home so
quick, and he responds that he was taken to the police station,
issued a summons, and was released.
Three weeks later, he has to go to court and face a judge.
Your son pleads guilty. The judge tells your son robbing the
bank wasn't a nice thing to do and asks if you son still has the
money that he stole. Your son replies that he spent about
$1,000, but still has the remaining $9,000.
The judge then fines your son $100 for his crime and goes on
to the next case. Your son is free to go.
Do you think he has learned his lesson? Do you think he will
ever rob a bank again? Do you think this could create a moral
hazard?
If your son could rob a bank for $10,000, and the only
punishment was a $100 fine and he got to keep the money, there
would be nothing preventing him from robbing a bank whenever he
wanted.
Forget getting a legitimate job, working, investing, and
saving for the future. Any time he needs money, he'll just rob a
bank. There's no risk in that!
Only fining a young man $100 for stealing $10,000 from a
bank would create a moral hazard. The punishment would not be
enough to deter the crime, and would, in fact, encourage it.
The same has happened on Wall Street, only much, much worse
and to a much, much larger degree. Alan Greenspan created
moral hazard over and over again. Ben Bernanke is following in
his footsteps. Wall Street packaged up literally trillions of
dollars of vastly overpriced derivatives and sold them to
investors. Executives of Wall Street firms got paid billions and
billions of dollars in outrageous salaries and bonuses.
Read the article about the
abuse of derivatives by Wall
Street. They took advantage of unsuspecting
investors. They made off with billions of dollars enabling them
to afford their multi-million dollar estates on the shores of
Long Island by the thousands. And now the truth is out about
what they have done.
And instead of ending up in jail, Ben Bernanke gives them
billions of dollars more at taxpayers/public expense.
That is moral hazard of the highest order.
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