My newspaper column out today is about the concept of "moral hazard" - and how there's a difference between financial moral hazard and political moral hazard, the latter of which is even more pernicious than the former. You can see this most obviously in the renomination of Ben Bernanke to head the Federal Reserve. Read the column here.
The term "moral hazard" may seem like a complex and even intimidating idea, but most of us, whether consciously or not, understand the principle because it's basic common sense.
Applaud your kid for punching another kid--rather than grounding him--and you've created a moral hazard that means he'll probably punch other kids in the future. Give your dog a treat--rather than a scolding--after it urinates in the house, and the moral hazard you've engineered makes it likely you'll soon be cleaning up even more sallow stains on your rug. In short, without consequences--or worse, with rewards--for wrongdoing, there is an incentive to do wrong. That's moral hazard.
To date, the national discussion about this concept has revolved specifically around financial moral hazard. And, as evidenced by trillions of dollars in public loans, guarantees and subsidies given to speculators to cover their massive losses, leaders in both political parties have no interest in preventing financial moral hazard--despite stern press releases to the contrary. By rewarding rather than punishing Wall Street for losing irresponsibly risky bets and by holding out the promise of similar bailout rewards in the future, politicians have incentivized even more irresponsible risk-taking for years to come.
But financial moral hazard is only half the story. The other half is political moral hazard--the mother of all other moral hazards. This is why Bernanke has been called "the definition of moral hazard" - because if he is confirmed by the Senate, it will send a message to all other federal regulators that they can fall down on the job and still get promoted.
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