Moral and Immoral Hazard

Rick Santelli has been all over YouTube, the blogs, and prime time news with what has been described as his "rant of the year". Santelli's complaint is a simple one - that the Obama mortgage plan is rewarding bad behavior, and that responsible tax payers are being forced to subsidize irresponsible ones. Economists call it "moral hazard". When certain bad behavior is subsidized or forgiven or bailed out, people are more likely to engage in that bad behavior in the future than they otherwise would have. A number of libertarian blogs have taken the "moral" part of "moral hazard" very seriously. Obviously, the broad sketches of this argument are completely sound. Nobody denies the logic of moral hazard, and it's not the goal of anybody who institutes these programs to reward bad behavior.

But I wonder if it's a misnomer. Really, it should be called "immoral hazard" - because the hazard about which we're concerned is that people will be encouraged to commit immoral acts. I think "moral hazard" could then be redefined to communicate the risk of preventing people from engaging in fundamentally moral behavior when a government chooses not to step in and guard them from what have been called the "rough edges" of capitalism.

Clearly - a completely irresponsible borrower is not going to learn their lesson if every single time they default they are forgiven by the government. I'm now calling that phenomenon "immoral hazard". But what about the responsible borrower, who only borrowed what they could afford and is now caught in the down-draft of a burst asset bubble? I would guess that if they aren't supported by the government (or some other benevolent white knight), they would be less likely to borrow responsibly in the future. They might rent, or borrow extremely conservatively - leading to an underutilization of available capital. They also might feel a little bitter that they are suffering from the mistakes of others, which caused the collapse in their own home value.

So of course we, like Rick Santelli, should be concerned with "moral hazard" (what I've renamed "immoral hazard"). One of the reasons why Santelli didn't really impress me was that his rant was so trivial. It's not like he was bringing new information to Obama's attention. Everyone knows about the problem. But what nobody is ranting about is the risk of punishing and disincentivizing good, moral behavior by standing to the side and doing nothing to help innocent bystanders who are being hurt by the irresponsibility of others. That's the real moral hazard, and that should be getting some attention as well.