Thursday, February 12, 2009

Moral Hazard

For economists, "moral hazard" is a technical term. (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.)

But there is another kind of moral hazard that must be defined more broadly, and on a higher level of responsibility. First, in terms of morality in the most universal sense -- i.e., doing the right thing; and hazard -- as in, placing ones soul in jeopardy by failing to do the right thing. In terms of this definition of moral hazard, our greatest problem is not that our financial system has been irretrievably destroyed (which it has), but that someone might somehow find some way to revive the rotting corpse, so something resembling the status quo could be restored and we could "get on with our lives" more or less as before. This would place the whole world in the greatest possible moral hazard.

The lesson to be learned is that the system has been rotten to the core for too many years, and by fixing it we will only be inviting even more disaster. There is no way we can ever get it back to some earlier, more innocent state, certainly not through putting some regulations and regulators in place and letting everything proceed as before. Which is what will certainly be attempted, especially if people like Rubin, Summers and Gaithner are in charge. Where billions of dollars are at stake, there is no way you're going to find regulators who can be trusted to actually regulate. Talk about moral hazard! They'll go through the motions for a year or so and it will then be back to the races.

Face it. The only way to proceed is through full nationalization of every failing institution and, ultimately, some type of socialism, which can be a very good thing indeed, if it's designed by people who know what they are doing and have a commitment to basic human rights and values, including democracy. There is no real alternative that would not involve the sort of moral hazard that would rot the soul and put us all right back to where we are right now: on the road to nowhere.

Let the system fail. Let the mighty fall! And build a decent, truly democratic, equable, society from the ashes. It's been done before. It can be done again. It must.


  1. Right! Example: by injecting money to the banks, people does not get more credit. Possible solution? Public banking that guarantees small credits to small entrepreneurs and families - in practical terms: nationalization of the banks.

    But there's no reason why we should stop at the banks, right?

  2. Right. You got. Hi Maju. Thanks for posting here.


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