Moral Hazard In A Market Economy?

With all of the hubbub in the media about the Fannie/Freddie bail-out by the Feds, the phrase “moral hazard” has been spewing from the lips of the pundits faster than you can say, well, faster than you can say just about anything.

There is a lengthy set of definitions of “moral hazard” on Wikipedia. The Economist defines “moral hazard” as follows, where obviously the ‘insurer’ in our debacle-du-jour is likely the U.S. taxpayer:

Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.

I thought the article “Who Else Can Pile On for a Federal Rescue?” in today’s Times, painted a useful picture of things. This quote from Jonathan Koppell of Yale sums up the situation for me:

Do we live in a market economy or not? If we do, it seems companies have to be allowed to fail. If we say companies can’t fail because they’re too big or the consequences are too great, we have something [other than a market economy].

Do we live in a market economy or not?

If you believe we do not live in a market economy, then what do you believe the economy is? Who runs it? Who is responsible for its continued operation and optimization?

If you believe we do live in a market economy, then can we continually suffer moral hazard?

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2 comments

  1. Pingback: The Hazard Of Moral Hazard « Myriad Missives

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