The Moral Hazard Argument

In the wake of the ever expanding mortgage mess, many states are offering programs to help buyers avoid foreclosure. Supporters of the efforts say they are necessary to revive the whole residential building industry, a critical part of the economy in terms of creating jobs, profits and personal wealth. Opponents say that the aid measures bail out a large group of people who made a very poor business decision, be it buyers who bought more home than the they can handle, lenders who wrote too big a loan on too weak a credit application, or the securities gurus who packaged mortgages in to pledgeable collateral.

Liberal types like myself have always taken the position that the collective interest of shoring up our broader economy outweigh the moral hazard of bailing out some folks who made stupid decisions. We are comfortable with that moral hazard -- the fact that individuals are saved from the consequences of their misdeeds. However, the latest crisis offers a challenge to that point of view. The country's relentless consumerism -- our true civil religion -- as well as the profit motive of people who enable it are a constant threat to economic stability. Do we owe it to ourslves to let some people bottom out on the shore of their bad decisions? Will the mortgage industry ever start to write legitimate loans unless they a loss hits their books? Will consumers ever start living within their means without the threat of financial ruin? is it legitimate to draw a distinction between how we treat consumers and how we treat business?

More later.