On October 18, 2007 , Harvey Rosenblum wrote an op-ed piece in the Wall Street Journal titled “Fed Policy and Moral Hazard.” Mr. Rosenblum was aiming his thoughts toward the Federal Reserve and the “Bernanke put”, citing support for further fed easing in light of few signs of inflation.
Tucked inside his contribution to that day’s Wall Street Journal was this gem of a paragraph:
If there is any true moral hazard in our economy right now, this is its source: Americans spend, save and invest in the belief that recessions, if they occur, will be short, mild and infrequent. People believe that unemployment is something that happens to someone else. Indeed, the younger generation in the work force has, for all intents and purposes, had almost no experience with the unpleasantness of a recession. To them, it’s just a word that begins with “R” but they cannot define it or describe it. That’s real moral hazard, because it drives their consumption and investment behavior.
Much has happened since 2007 to families, companies and our federal debt. However, the wisdom Mr. Rosenblum shared in his paragraph endures.
Our consumption and investment behavior has been a moral hazard.
Our consumption and investment behavior has led to huge trade deficits with other countries, a current account deficit with other countries, growing federal debt, home foreclosures and many people poorly prepared for retirement.
Mr. Bernanke once defined “moral hazard” in a book he coauthored as “the tendency of people to expend less effort protecting those goods that are insured against theft or damage.”
Yes, Americans did expend less effort protecting themselves financially. Investors provided no-down-payment mortgages and home buyers who could never have afforded to make payments bought homes with those mortgages.
So where is evidence of the moral hazard? It is in the government loans to corporations and banks. It is in the home buyer tax credits. It is in the low high school graduation rates in many parts of the country. It is in the low saving rates. It is in the expectation of federal money to solve local and state fiscal problems and provide a safety net to families – money that is borrowed from foreign investors who buy our government bonds.
Future tax increases, especially for the wealthy, and growing transfer payments from the federal government to households and local governments will perpetuate the moral hazard.
There is no sign of a reduction in moral hazard – no incentive to add value to one’s self, to learn, and to save and invest. Instead, we have seen “cash for clunkers” which promoted debt and spending, and we have seen home buyer credits, also promoting debt and spending.
If things don’t seem quite right blame it on moral hazard.
Related Information in Prosperity View
- Housing Moral Hazard Act III: Behind on the Mortgage Payment and Spending at the Mall
- Should Those Who Lived Within Their Means Help Those Who Didn’t?
- Warren Buffett on Investing
- Tax Cuts for the Rich Increases The Taxes They Pay – The Wealthy Are Different
- Prosperity’s Robin Hood – Taxes from the Rich and Bailouts to the Poor
- Dollar will Drop so Don’t Invest in Dollar Assets – Marc Faber
- Our Retirement Planning Problem: We Make Mistakes on How We Earn, Spend, Borrow, Save and Invest
- Saving Money – Start the New Year With an Attitude to Save Money
