Applaud your kid for punching another kidratherthan grounding himand you've created a moral hazard that means he'll probablypunch other kids in the future. Give your dog a treatrather than ascoldingafter he urinates in the house, and the moral hazard you've engineeredmakes it likely you'll soon be cleaning up even more sallow stains on your rug.In short, without consequencesor worse, with rewardsfor wrongdoing, there isan incentive to do wrong. That's moral hazard.
To date, the national discussion about this concepthas revolved specifically around financial moral hazard. And, as evidenced bytrillions of dollars in public loans, guarantees and subsidies given tospeculators to cover their massive losses, leaders in both political partieshave no interest in preventing financial moral hazarddespite stern pressreleases insisting the contrary. By rewarding rather than punishing Wall Streetfor losing irresponsibly risky bets and by holding out the promise of similarbailout rewards in the future, politicians have incentivized even moreirresponsible risk-taking for years to come.
But financial moral hazard is only half the story.The other half is political moral hazardthe mother of all other moral hazards.
Consider, for instance, Federal Reserve Chairman BenBernanke. He's the top regulator who not only sowed financial moral hazard withthe Fed's post-meltdown bailouts, but openly admits that as the crisisdeveloped, his Federal Reserve "should have done morewe should have requiredmore capital, more liquidity (and) we should have required tougher riskmanagement controls."
Firing Bernanke would tell other regulators thatthere are consequences for negligence. Instead, President Obama rewardedBernanke with renomination and thus manufactured a pernicious problem. Aseconomist Dean Baker says, just as bailouts create a financial moral hazardgiving speculators no incentive to avoid excessive risk, Bernanke'srenomination creates a political moral hazard whereby regulators "will nothave an incentive to do their jobs properly (because) there are noconsequences" for failure.
The Democratic Congress, of course, could rejectBernanke's nomination for being "the definition of moral hazard," asRepublican Sen. Jim Bunning, Ky.,correctly noted. But that seems unlikely, considering how many Democrats havebeen aggressively embracing moral hazard.
When Senate Democrats ratified Obama's nomination ofNew York Fed chief Tim Geithner as Treasury secretary, they rewarded yetanother shill who also fell down on the regulatory job. When those same SenateDemocrats considered the nomination of Gary Gensler to head the agencyregulating derivatives, they could have rejected him for championingderivatives deregulation as a Clintonofficial and then cashing in as a Goldman Sachs executive. Instead, Democratsbacked his nomination and effectively told every other Gary Gensler-likeparasite that misguided actions and corruption don't prevent future promotion.
And let's be fairit's not just Democraticpoliticians who are creating political moral hazard. Many Democratic pundits,activists and voters continued cheering on President Obama while he stuffed hisadministration full of Wall Streetersand many of these rank-and-file voicesattacked as disloyal those progressives who raised questions. That told Obamahe faces few consequencesand even defensefrom his own base for promotingthose who engineered the economic meltdown.
The only open question is whether the public atlarge becomes complicit, too. Come election day, if there are no consequencesat the ballot box for the politiciansDemocrat or Republicanwho legislatedbailouts, supported these appointments and are now working to undermineproposed Wall Street reforms, then America will have created the biggest moralhazard of all.
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