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Tom Toles
Posted at 07:15 AM ET, 06/25/2012

Hazardous morals

Moral hazard is a very badly named concept. VERY badly. It’s a plenty good concept and plenty relevant, but it’s almost impossible to discuss because of that name “moral hazard”. Having some familiarity with religious instruction, I know what “moral hazard” brings to MY mind. Sex. Of course, so does pretty much everything, but “moral hazard” certainly suffices.

The real meaning of “moral hazard” in economics..... let’s stop right there. WHY is an economics concept tagged with the word “moral”? Isn’t economics supposed to be a bloodless analysis of resources via capital allocation? Well, mostly! And in fact this instance doesn’t have much to do with “morality” either. It’s a motivation and behavioral response to risk placement. Zzzzzzzzz. Maybe they called it “moral hazard” to wake people up. But then they just go back to sleep when they can’t connect the name with the concept.

The concept is that somebody takes more risks when somebody else is on the hook for the consequences. In the common usage it tends to be applied to ordinary people who, say, took out a loan they didn’t understand and couldn’t afford, and the “morality” of the situation is they need to be punished when they ask for help. That’s what Jesus would do, after all. It is not so often applied to the Financial Algorithmites who created the incomprehensible financial vehicles that ensnared the foolish, because they are Too Big to Fail. The others are merely Too Small to Avoid Stepping On. This situation is essentially unchanged since the collapse. Morals and hazard for thee, profits for me.

By  |  07:15 AM ET, 06/25/2012

 
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