Words to Know:Moral Hazard
Here’s a good phrase to know: moral hazard. According to Wikipedia, the definition of 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.
In other words, someone with insurance (or any other backup plan) will do crazy things. Things they wouldn’t otherwise do. We see this phrase coming up in the news this week because if congress bails out all these people who defaulted on their mortgages, then they are increasing the risk for moral hazard in the future. They would essentially be sending the signal that consumers can take any risk they want because they can always count on the government to bail them out. This is the trickiest part of the mortgage meltdown: how do they separate the speculators from those who made honest mistakes? It is going to get ugly, so get ready for the conservatives to start dropping the “moral hazard” argument.
USA today has a good summary of the arguments in this article.
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