Moral Hazard

If, over the years, you read the financial news in The Economist, the Financial Times, or The Wall Street Journal, you'd be familiar with the term Moral Hazard. It is something free-marketeers hold dear, almost a quasi-religious belief. Here's a partial definition, found at 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."

Fredie Mac and Fannie Mae have gotten themselves into a lot of trouble by taking on bad loans - and are involved in roughly 50% of all home mortgages in the US - but being a private company that is also answerable to the federal government, they took on risks that they knew the government would back up if they failed. Voila! - a moral hazard.

James Surowiecki of The New Yorker has written an article entitled Sponsoring Recklessness about the current situation. It won't hurt you to read it.

It seems to me that the entire Bush presidency has been sponsoring recklessness all along - and not just in matters financial.

Also, Ken Silverstein takes note of Dow 11,349.28.