"Moral hazard is the probability that a party insulated from risk will behave differently from the way they would behave if 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 with increasing recklessness, literally 'without reckoning.' It also encourages the rise to power of sociopaths in society as a whole.
It is difficult to explain moral hazard to tenured professors or the pampered princes of bureaucracy, who beat the drum with their silver spoons in support of shifting the risk of loss to the public every time that Wall Street falls into one of its own schemes and blows itself up.
It is a lesson that the average person learns by the age of twelve and relearns, sometimes spectacularly, at least once in young adulthood. If you do something wrong there can be bad outcomes, and you will pay the price and penalty. Unfortunately there is a small but powerful oligarchy of privilege that is trying to project themselves onto the global stage while believing that they are immune to ordinary consequence, and have become addicted to the notion that 'others must pay' for their failures.
Moral hazard comes from rewarding bad behaviour in markets with wristslaps and bailouts. It is a danger to the economy and to the public.
Now we might expect even more brazen attempts to game the system. This inevitably leads to wild gyrations in stocks and bonds and commodities. History suggests ever more brazen price manipulation so disconnected from reality that actual physical shortages result because of the corruption of the market pricing mechanism.
Can't happen? Enron made it happen in the energy markets, and almost brought California, a state the size of most countries, to its knees.
The wristslaps and bailouts will continue until these modern maestros kill themselves or someone else, and create damage too great to be bought off in the backrooms of the county courthouse.
At least their descent from the heights will be impressive, if you can avoid the impact crater."
Jesse, Moral Hazard, 22 March 2008
