Enough About Moral Hazard Already

Now you know I'm pretty much a libertarian, which means sensitivity to the matter of moral hazard is in my blood. But I have to wonder whether this fresh wave of incessant handwringing over bailouts and moral hazard is going a bit too far.

Now I'll digress for a moment and note that I started thinking about this earlier Thursday, and in fact said as such, right around 2:20 Thursday afternoon over on Twitter. And of course, no sooner did I post that than Paul Kedrosky* had a whole post up on the exact same topic, which I knew would just make me look like a copier. Unfortunately, not all of us can post to our personal blogs every moment we have an idea.

The good news is that Paul lays it out much better than I would have, had I posted on the subject first:

Pulling members of a Monopoly club off a train-track just before a train whizzes through creates moral hazard -- and it feels particularly bad if the someone now gets to put his hotel on Park Place after all -- but leaving them there to be sliced and diced, or causing the train to be derailed, is almost certainly worse.

Agreed. It's not that we should bail out every business or home owner that gets in trouble. We shouldn't. But simply saying that a bailout is unconscionable because it could create moral hazard isn't in itself a compelling argument. If fiscal policy were a game of Rock/Paper/Scissors, moral hazard would not be the equivalent of the stick of dynamite that trumps all three. Yes, it's one thing to consider -- a very important thing, but certainly not the only thing.

And you know what: all these people complaining about Wall Streeters getting a bailout but not homeowners -- I don't think that's that absurd. I'm not sure what's feasible -- and at some point, you have to release the lever and let things play out -- but there is a point to be made. I will say this: I don't think the home buyers are the ones guilty of being too risky. I think the concept of risk never entered their mind at all (it's a home. It's secure. period.). I do think that the lenders though were guilty of ignoring risks, so if there's any party where you'd worry about moral hazard, it would be them.

* By the way... I wonder if Paul and I were both prompted to think about the moral hazard question after a particular guest on CNBC cited it as a reason not to bailout homeowners, and it just seemed really forced and phony, like they just thought about this in the past week once everyone started talking about it.