In 2008, many of us got a crash course on the term "moral hazard," whether we wanted it or not. At least once a week, it seems we're reminded of this term's importance, and why our economic freedom is seriously endangered by current policies that prop up failing, mistake-ridden companies and industries.
"Moral hazard" is an economic term that originated from the insurance industry. Basically, it refers to the likelihood that individuals or entities will perform dangerous, risky acts because they know they have protection -- a safety net -- if something goes awry. The "too big to fail" motif so prevalent in 2008, and so linked to the idea of "moral hazard," exemplifies the slippery slope we've found ourselves on.
Lining up for help
Many of us worried that the original Troubled Asset Relief Program (TARP) bailout would be a sucker punch, creating ever more expensive and dangerous moral hazards. Sure enough, more and more companies have been lining up for TARP assistance, many of which don't seem to represent the essential functions government wanted us to believe TARP was intended to protect.
Apparently, after enjoying a decade of risk, greed, and gluttony, nobody wants to face the miserable but necessary hangover that inevitably follows. American Express
What's next -- the newspaper industry, perhaps? I guess companies like Tribune or Gannett
The devil's in the details
"Moral, adj. Conforming to a local and mutable standard of right. Having the quality of general expediency."
- Ambrose Bierce, The Devil's Dictionary
I'd say the sarcastic definition above is spot-on these days. In the wake of our recent financial meltdown, so many people seemed to panic, swiftly sacrificing principles and common sense alike. Fear of consequences has pushed government and business into a treacherous tangle of safety nets and "expediency."
As much as it pains so many policy-makers to reward failure or bad action, it seems that, darn it, it's just got to be done to save us all. Never mind the ominous idea that we could fail like Japan, with a bunch of zombie corporations staggering around for a decade.
I think we've been mugged and conned. The risk of the wholesale destruction of the American economy is most certainly real. When businesses face no risk of failure, they're free to do almost anything they want, however disastrous. That's the essence of the current danger.
Congressman Ron Paul, R-Texas, recently posted on his blog about the Big 3 bailout, writing that freedom includes the freedom to fail. This is important and very true. On our present course, government takes funds from companies and individuals who did the right thing to reward the failure and mistakes of others. That ill-advised principle makes these times morally hazardous indeed -- for our economy, for our basic economic principles, and ultimately for our freedom.
The bailout buck must stop -- the sooner, the better. Let's just hope that when it does, it's not too late for the rest of us.