Monday, February 02, 2009

James Suroweicki posits that the fear of moral hazard is a loser

His conclusion:

Finally, the biggest reason that moral hazard matters less than it might is that it can operate only if people actively countenance the possibility that their decisions could lead to complete disaster. But it’s well documented that people generally, and investors particularly, are overconfident and significantly underestimate the chances of being wiped out. The moral-hazard fundamentalists argue that banks and other financial institutions will act recklessly if they think they’ll be rescued in the event of failure. But Wall Street was reckless because it never believed that failure was even a possibility.

The patchiness of the moral-hazard argument doesn’t mean that we should simply rubber-stamp another bank bailout; that may be both unjust and a poor strategy for whipping the financial sector into shape. But it does mean that the failure of Lehman Brothers was an unnecessary and costly sacrifice to moral-hazard fundamentalism. It also means that we should not sit quietly by because we fear that government action today will lead to reckless market behavior years from now. Moral hazard has its costs. But, so far, our fear of it has proved much more expensive.
You know what I fear? Stimulus spending that does not stimulate. All that leads to is:
1) debt for future generations to repay, for which they had no say in creating
2) deadweight losses from ineffective programs
3) a government bubble which crowds out private investment
Basically, a bunch of moral hazards.

No comments:

Post a Comment