Moral Hazard. If you haven’t already heard about it, be prepared. It’s a monster epithet. The Republicans will be hurling it at those attempting to develop plans to assist defaulting home owners. Namely, one President Obama. I can already see Eric Cantor, the House Whip, parting the clouds to hurl his epithet from on high. He’s positively giddy, I am sure, to be getting an opportunity to condemn liberal (or perhaps even socialist) politicians seeking to help people who have been “irresponsible” about their finances.
Moral Hazard refers to situations in which organizations or individuals are tempted to break or modify a contract if the risk associated with the agreement can be transferred. With regard to the current mortgage crisis, if we set aside high rolling institutions, it boils down to this: home owners with mortgages agreed to pay lenders back on certain terms. If the government now assists those who can’t keep up their side of the bargain, that is, make their mortgage payments, they are creating an incentive for future bad behavior. The government is creating a moral hazard. When viewed in these terms the so-called moral hazard issue can be understood as akin to the slippery slope dilemma. Once you do X, say, have a beer, before long you will become an alcoholic. Doesn’t sound plausible? Okay, here is a more common one: if we provide birth control to young people, it will lead to rampant promiscuity. Likewise, if we provide assistance to those who have gotten in over their heads by having mortgage payments that are too expensive, it will lead to people running around and buying things that they can’t afford (assuming that they will be rescued). It will lead us (as a nation) to become irresponsible about our finances. QED
Ah, wait you say. You think that this horse has been out of the barn for quite some time. I couldn’t agree more. I don’t think that helping a few million people (out of a population of 300 million) who are going to lose their homes is going to create a culture shift, that is, get the horse back in the barn. Perhaps Cantor and friends believe that by drawing a (Maginot) line in the sand they will begin a great transformation of our culture. We will halt financial irresponsibility, etc. There are labels for people who believe in magic of this sort: radical right wing utopians. Change just doesn’t work this way. Further, these utopians would love to mislead us about what’s actually happened and frighten us about an imminent moral collapse.
1) Such radicals might say that people should have known better. Many/most people who are in dire straights acted in good faith when they took out a loan to buy or refinance a home. There was supposed to be a process in place that told them whether they were qualified or not. Now you can say, well, they shouldn’t have listened to the banks that wanted to lend them money to buy a home. But this would have been counterintuitive for most folks. If a bank wants to lend me its money, it must know what it is doing. It’s the bank’s money, after all. Why would they give it to me if I were a risk? That’s a reasonable assumption. And it’s one that the banks wanted us to accept.
2) I haven’t seen the banks, credit card companies, or mortgage houses doing anything to help inculcate the proper attitudes toward financial responsibility in the populace. Quite the contrary. They spent millions (billions) to advertise the virtues of easy credit. The economy road on this paper tiger for years, and the bankers laughed all the way to their banks regarding how much debt that they could get people to absorb by offering items such as “teaser rates.”
3) Does anyone really believe that many folks are going to run out and start taking mortgages that they can’t afford, because they think that they can depend on the government for a rescue sometime in the future? These are extraordinary times. Help that may come from the government now is not something that people will be able to depend on in the future. Hell, they can’t even be sure that they will get it now.
4) The phrase “Moral Hazard” sounds very serious and terribly scary, as if the entire moral sky will fall if we succumb to granting aid. Right wing radicals would love us to believe that the notion of “Moral Hazard,” and their contractual understanding of morality, should be at the center of all of our ethical and political deliberations. It is the talisman that can hold big government at bay. However, the kind of personal responsibility that it refers to is a piece of the moral puzzle that is our lives, not the whole puzzle.
We must keep our guard up to defend against a Moral Hazard tempest in a teapot (dome). Republican discourse about MH associated with mortgages tends to focus on individuals. They want to make sure that individuals are not rewarded for bad behavior. But when one lives in a society in which wealthy individuals, rich bankers, CEO’s, etc, are regularly rewarded for bad behavior, it’s unproductive to start scolding the little guy. There are bigger fish to fry. And further, perhaps more importantly, holding fast to worries about MH in the current economic crisis is like saying that we should let the ship sink–and we are altogether in a ship of state on this one–so as not to reward the shipbuilders for having done a lousy job. People like Cantor will argue that if we plug up the holes, we will just be doing the builders a favor. And if we give home owners assistance, we will just be rewarding them for lousy planning and disrespect for contracts. Even if this were true and things were this simple, which I dispute, we would still need to assist these homeowners in order to help stop the bleeding in the economy. Their losses will continue to become our losses if we don’t stop the death spiral in the real estate market.
Deep commitments to broad stroke principles–for example, never create a situation in which you seem to reward someone for behaving irresponsibly–must not get in the way of common sense. This is why we must all be pragmatists now.