Monday, March 17, 2014

Moral Hazard and Government

There's a room where the light won't find you
Holding hands while
The walls come tumbling down
When they do, we'll be right behind you
--Tears for Fears

Hard to imagine an environment more laden with moral hazard than the current one. The primary factor contributing to the situation is ever growing size and scope of government.

Moral hazard arises when people think their behavior is insured. If people sense that someone else will cover their losses, then they are prone to take more risk.

Thus, if someone will provide economic resources in the event of unemployment, then people will be less prone to look for work or to build capacity for work.

If someone will provide healthcare resources in the event of illness, then people will live less healthy lifestyles.

If someone promises to regulate consumer goods production, then people will be less prone to vet products themselves.

If someone promises to return deposits in the event of bank failure, then depositors will be less prone to assess the balance sheets of banking institutions.

If someone promises to compensate investors for losses in securities markets, then investors will take positions in riskier securities.

The greater the government intervention in human affairs, the greater the moral hazard.

1 comment:

dgeorge12358 said...

The best thing undeniably that a Government can do with the Money Market is to let it take care of itself.
~Walter Bagehot, 1873