In this whole mortgage mess, the phrase “moral hazard” comes up an awful lot.Â When capitalism gets out of line, I think it’s always tempting for capitalistsÂ to look at incentives, say they reward bad behavior, and then focus thereafter on the incentives as the problem. But aren’t thereÂ always incentives for bad behavior? Isn’t that the whole point of cheating; because if it works it pays off?
Another commonÂ phrase these days isÂ “incentivization,” an Orwellian neologism that implies the only thing keeping us from turning into complete savages and pillaging our neighbors is that we are otherwised directly compensated for not doing so. It’s a conceit of academic economists, I think, who hate the idea that there are aspects of a good society that can’t be understood with an equation.
The mainÂ problem with the mortgageÂ debacle is pretty simple, even if the finances aren’t: some bad people cheated. There are ways to fight that, but not ways to guarantee it never happens. There is no system in the world that will eliminate every reward for bad behavior. The FNM managers probably broke laws and certainlyÂ violated their fiduciary responsibility, at the very least, but we’re to believe that the real problem was the moral hazard created by their implicit government backing? Chicken shit. The modern world is rife with moral hazard: we are almost never held accountable for our actions on behalf of others, and most of us work in situations where we are on the hook for very little of what is at stake. What ultimatelyÂ keeps people from taking all manner of advantage of the myriad safety nets in our world (the GSEs are just an extreme example) is something that is not at all fashionable to discuss: morality. Not the religious pious type, but the social-minded morality that compells one toÂ act honorably even if we haven’t been direcly incentivized to do so by some board of managers. Because cheating really does work out quite well for the individual who does the cheating.
These Wall Street crooks should be detested as pariahs, not seen as the inevitable victims of a poorly designed reward system. This is not to say we need no laws, or that incentives should be ignored, just that they are neccesarily but not at allÂ sufficient conditions to a proper functioning society. Integrity cannot be regulated into people.