Live Without a Parachute; ie No Moral Hazard! July 23, 2008Posted by shaferfinancial in Uncategorized.
Tags: FDIC insurance, government bailouts, moral hazard, social security
The new catch phase around the net is moral hazard. Described as 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 is being bandied around the idea of bailing out Fannie and Freddie. But moral hazard has been created by the government for a long time through its policies. Take FDIC insurance for example. People are protected from the possibility of losing money in banks (up to $100,000). This is surely moral hazard and I am glad its there. Or the tax laws which allow tax deductions for mortgage interest and real estate taxes. Once again protecting folks from the real cost (risk) of home ownership. And of course the grandaddy of them all social security. Without which 90% of retired folks would be starving. Yep, protected from their failure at saving money, but without that protection we would live in a different, much colder, Dickens like world!
Remember it is easy to throw stones at the mortgage folks now, but if you really want them to suffer the full consequences of their actions, then you might want to look at the full consequences of individual behavior along with it. Without social security in your future, are you prepared to starve? Or are you going to be capable of living off your savings for 20 years?