Moral Hazard, Moral Bankruptcy

With the announcement this week that the federal government is putting even more money into Citigroup to keep it afloat and the sentiment in Washington leaning toward keeping the U.S. auto makers in business as well, it seems that there is no end to the amount of money we’ll end up printing in an effort to “stimulate the economy.” That notion of stimulating the economy probably helps the medicine go down as politicians describe why we’re undertaking these measures. However, let’s at least be honest about it; this isn’t actually going to stimulate the economy as much as it will pull our bacon out of the fire in the short term only to have another day of reckoning later.

We’re now on the proverbial slippery slope. Where does it stop? It probably doesn’t stop soon. Will legislative bodies at the state and federal levels finally decide to be fiscally disciplined in spending on other measures in order to focus our economic resources on meaningful stimulus like tax cuts, or will we just spend to save the economy today only to raise taxes on our grandchildren to levels that douse any incentive they have to grow wealth? Will legislative bodies at all levels cut the pork out of the budgetary diet in order to save our economy, or will short-term thinking continue to pervade every aspect of government? Given the fact that we haven’t put aside other spending while in a two-front war, we probably won’t for this crisis either.

The government bailout of financial companies is disagreeable enough, but at least I can ascend to the point that we need bank solvency (which isn’t an economic stimulus; it’s a critical driver). But we don't need to make automobiles in the U.S. We need to let bankruptcy laws work. Taxpayers shouldn't be forced by their government to take risk in a failing auto manufacturing system when capital markets have decided that the risk is unpalatable.

As a capitalist society, we seem to have simply increased the moral hazard. In insurance, moral hazard is the prospect that someone insulated from risk may behave differently from the way he would behave if he was fully exposed to the risk. The common example is someone not locking his car because; after all, he has insurance if it is stolen. Our government, in providing rescue funds has most likely increased the behavior of risk taking in the future by insuring investors from loss. Actually, investors may be less prone to take risks since it appears that the beneficiaries from the current bailouts are executives, not investors.

Morally bankrupt may be a good definition for the current situation. Because of our lack of moral leadership and resulting attitudes on stewardship of resources, we continue to have legislative bodies in our nation with the attitude of, “Let's maintain our power as long as we can by giving people anything they want.” Where will it stop?

As our heirs figure out where we lost our influence as a nation, they are likely to ask, “Why didn't they make the hard choice to stop?”