Don’t miss Daniel Henninger’s column on moral hazard in today’s WSJ.
The concept of moral hazard is well known to economists and at least intuitively understood by most non-economists: people will be inclined to undertake riskier activities if they’re sheltered from adverse consequences. Does that have something to do with our current crisis? It certainly does, for behind all the foolish lending stood “government sponsored enterprises” Fannie Mae and Freddie Mac. Lenders who in the past would have thought, “There’s a good chance we’ll lose money on this” instead thought, “Why not — the government is going to back this up.” People act differently when they have money right on the line.
Henninger also points out that the feds recently approved a $25 billion “loan” to the auto industry. He suspects it won’t be a loan at all, but the first of a string of welfare payments. Would anyone put his own money on a bet that this $25 billion will be repaid and there won’t be any more such loans?
