The Dukes of Moral Hazard
November 13, 2008 Leave a comment
Yesterday, the Wall Street Journal discussed the impact of moral hazard on the behavior of both corporations and individuals. With the ever increasing amounts of money being doled out to those who invested in risky derivative securities and their underlying assets, the impact of moral hazard cannot be ignored. Wikipedia defines moral hazard in the following way.
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were 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 less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.
There is great debate about whether the current efforts by the US Government will lead to a greater risk of increasing moral hazard. Some may compare today’s situation to the behavior of the good ol’ boys in the old TV show, “The Dukes of Hazzard”. They never crashed their car or went to jail even though they drove recklessly in every episode. Sound familiar?