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Moral Hazard

How come I never heard of "moral hazard" until this economic crisis? (Though, come to think of it, it might be a good title for my memoir.)

There are a couple of letters in the Post today that capture the anger of those who have been prudent rather than reckless. One letter writer says:

"Any mortgage bailout should include fair play for prudent people who stayed away from grossly overpriced properties and risky loans and instead chose to ride out the housing bubble in apartments or smaller, affordable homes. We should not ask these people to subsidize their profligate neighbors with their McMansions, who stand to cash in big when prices rebound."

And see this piece today in Politico. The take-home quote, from an anonymous Silver Spring resident:

"I'm not sure why we should work and pay for someone else to have a granite countertop or an extra bathroom."

This issue is potentially explosive and will pose a challenge for Team Obama. Maybe they should hire David Brooks to explain why, in managing an economy, bad things sometimes have to happen to good people, and vice versa.

(The Brooks column has some good reader comments, including this one:

"Ultimately, we need to face reality: wealth is built on producing useful things sustainably with limited resources, not on spreadsheet fantasies. This requires an investment in local and regional economies, and a return to rewarding honest work (not necessarily more than forty hours a week, and not necessarily in a dangerous workplace). Unfortunately, as Einstein may or may not have said, "Two things are infinite--the universe and stupidity. And I am not sure about the universe.")

(And another: "All of you complaining about not wanting to bail out all those millions of people who ostensibly bought 4,000 square foot McMansions on a cashier's wages sound like the Reaganites moaning about welfare queens in Cadillacs. You clearly have no idea what the reality is here. My husband is a mortgage broker and we live in a suburb of Detroit, so we are doubly screwed. And here is what I know about what's going on: BANKS ARE REFUSING TO LEND. People who live in modest homes that they could once easily afford have had their circumstances change. They've lost jobs, their homes' values have plummeted, etc. They want and need to refinance and are perfectly qualified to do so. But they can't because the banks that we just paid hundreds of billions of dollars to are simply not refinancing. So now we have to give them a trillion more to "encourage" them to loosen their lending. What part of the word "extortion" do we not understand? And if you are trying to buy a house, you can forget it as well. Underwriters are placing extreme and unmeetable conditions on loans. And if you have or are trying to buy a condo, you can forget it. So my husband has a line of customers out the door, but he's having a hell of a time getting anything closed. So his income has fallen dramatically and we're barely getting by (fyi to all you smug people: not everybody gets a salary; some of us are commission-only and contract workers). We couldn't sell our modest three-bedroom house if we wanted to because the Detroit real estate market is dead. And now we're at risk too, even though we could afford our house perfectly well before the Republicans, bankers, and CEOs drove the whole lot of us off a cliff. So thanks for your understanding, everybody, and now shut up and get with the program of saving our country.")

Here's a Lawrence Summers piece on moral hazard from a couple of years ago (via Wikipedia's entry on M.H.).

By Joel Achenbach  |  February 24, 2009; 2:02 PM ET
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Next: Hope Springs Eternal


Er, posted last kit re retirement. No need to repeat, I think.

Posted by: Wilbrod_Gnome | February 24, 2009 2:41 PM | Report abuse

I completely understand the frustration, Wilbrod. We've been getting a lot of calls about it. :)

Now, to read the new kit.

Posted by: Sara54 | February 24, 2009 2:43 PM | Report abuse

Outside of empathy, I guess the quick answer is that nothing pulls down the housing prices in a neighborhood faster than a bunch of fancy homes with "foreclosed" signs.

I understand the moral outrage, goodness knows I share it. But we are talking about a tightly interlinked system here. The failure of one quickly contributes to the failure of many.

Posted by: RD_Padouk | February 24, 2009 2:43 PM | Report abuse

RD, I get the outrage part, but not calling it moral. Really, most of the time, one must just let people get the outrage out of their system. When one takes a city like Cleveland into consideration, you see that the city ends up paying buckets of money to manage the aftermath of the foreclosures.

The costs keep mounting unless the city finds a way to keep people in their homes.

Posted by: russianthistle | February 24, 2009 2:48 PM | Report abuse

This is exactly why Jeremy and I are still in an apartment.

And when it's clean, I love our apartment.

Right now, not loving it. But I'm really working on my organization thing. We have my art studio finished so I no longer have to dirty up the living room with painting, I have three months of meals planned and shopped for (for $400 minus meat! Go Sara!), we're planning on cleaning a little every night to avoid having to clean for hours on Saturdays, and we're starting yoga to provide some peace of mind (and weight loss).

Posted by: Sara54 | February 24, 2009 2:49 PM | Report abuse

The moral rectitude people will really get steamed up over the notion of holding a debt jubilee. Here's Niall (pronounced "Neal") Ferguson, no less:

Evans-Pritchard at the Telegraph suggesting a Biblical debt jubilee:

And finally, Dan Roberts at the Guardian, writing in 2014, has sent back a report on the jubilee's effects:

And finally,

Posted by: DaveoftheCoonties | February 24, 2009 2:59 PM | Report abuse

Finally, finally, the House has been a hungry beast this year, what with roof, kitchen, upgraded hurricane protection, and several new windows.

Posted by: DaveoftheCoonties | February 24, 2009 3:05 PM | Report abuse

On NPR the other night, I heard the same complaint about granite tabletops and Jacuzzis. OK, yes, you're right (rhetorical 'you'); it is evident that your neighbors foolishly took equity out of their house in order to buy these things, putting the house upside-down or underwater (choose your favorite metaphor) when the market unexpectedly turned against them. They should have been better prepared for disaster. It is obvious that the only just and fair punishment is to bleed them of all their liquid assets in a futile attempt to pay off their mortgage, after which your neighbors deservedly will be kicked to the curb, minus their belongings, which will be sold at auction for pennies on the dollar to make back maybe a month's worth of mortgage, leaving your ex-neighbors (kids and all) destitute and homeless. It's only justice. In exchange for this justice, you (the prudent neighbor) get the peace and tranquility of living next door to an empty, shuttered, and uncared-for house that, if you're lucky, will go for 50% of the former asking price and pull down the value of your house to 75% or so of its previous value. If you're lucky. Otherwise, it just stands empty, not contributing to the property tax base, so that your property taxes need to be rapidly ratcheted up to pay for the services that you continue to enjoy. Prudently. Hope this doesn't put you upside-down on the prudent loan that you took out to pay for your own house.

Justice is justice. Let those imprudent losers hang, and take me with 'em.

Posted by: ScienceTim | February 24, 2009 3:19 PM | Report abuse

Oops! Not Jacuzzis. Extra bathrooms.

Posted by: ScienceTim | February 24, 2009 3:20 PM | Report abuse

Wasn't "Moral Hazard" a thrash-metal band from the late 80's?

Posted by: martooni | February 24, 2009 3:28 PM | Report abuse

You shoulda heard Santelli's rant on CNBC today! He and Liesman really got into it!

I think there are more than 10 fingers from which to point blame for this mess. However, my husband and I are pre-retirees, so the loss of value to our 401k is devastating. We're not so sure how much the value of our home may have tumbled since the meltdown early last fall. Thank goodness Citi didn't take over Wachovia, our troubles could be doubled.

As it goes, I tend to side with the populist Santelli vs. Brooks (I say this gritting my teeth knowing that Wells/Wachovia is propped up my TARP I. However, my husband is just about to hit, in about 20 minutes, working for 36 straight, frickin' hours! No shower, no sleep, can't even break for lunch.).

If you want moral outrage and there's plenty to heap up in a giant serving, there's this Tom Friedman column from Nov. 25, 2008, headlined "All Fall Down." Ahhh, Home, Sweet Home!:

“Long Beach Financial,” wrote Lewis, “was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.”

Now this financial fiasco rereported by Friedman is fodder for moral outrage!

Posted by: laloomis | February 24, 2009 3:43 PM | Report abuse

Eating a cookie from Quiznos. It's very good, but got me to thinking:

Why isn't it "cooky" with "cookies" being the plural?? I'm semi-serious here.

Posted by: Sara54 | February 24, 2009 3:47 PM | Report abuse

I replaced my decrepit (mostly because I refuse to use a chopping block) laminate counters with granite a few years ago. I ridiculously assumed they would have better utility and increase my resale value by some negligible fraction of the installation cost. Silly me.

I also took out a huge HELOC to consolidate a wad of credit card debt that had been circulating in one form or another since my honeymoon. That loan has been hovering around 4% and is a fantastic deal compared the usurious credit card companies I had been getting serially scammed by.

I am certain that my current debt to value ratio is below the 80% that makes the package refinancible if I were so inclined. I had hoped to tap the remaining funds available on the HELOC to pay for a week or two of my kids tuition some year, but like the UGMA my parents started, that money isn't going to see the light of day.

So I will continue to live my life as a financial grasshopper and assume that Social Security will give me a base income to pay property taxes and utilities for the ACLF unit I buy if and when I can downsize my empty nest. I will also hope that my rather equity heavy retirement funds will someday rebound through the miracle of dollar cost averaging.

My long term health goals are to never need vi@gr@ and to stay Alzheimers-free until the mortgage is paid off.

But when I am destitute and my belongings are on the street, you are welcome to come and mock my faith in the free enterprise system while spitting on me and offering me bulk recycling rates for my collection of Vonnegut first editions. I will have deserved it. I am a veritable sand trap of moral hazard on the golf course of life.

Posted by: yellojkt | February 24, 2009 3:52 PM | Report abuse

This morality thing seems Republican. So black-and-white. As I see it, life is all about shades of gray.

I don't think people consciously went out to make themselves upside down on their mortgages. Several weeks ago, I read about a couple who refinanced to take out equity for college tuition and are now completely upside down. Tough situation; seems to me that the kids need to step up and repay Mom and Dad for the education.

(Of course, I wonder about that. I was a person who took home half her gross pay because I had money going to so many savings accounts, including one for each kid's college education. But then I'm anal about debt, never had any except the mortgage.)

There is a house about a block and a half from me that went through foreclosure several years ago. Somebody bought it, did a lot of updating to it, tried to sell it for more than the market would bear, then walked away when it didn't sell. Now that wasn't very smart. You have to wonder what they were thinking, and what the loan officer was on.

I've also read that many of the bankruptcies in the US are caused by medical bills. Now that's just ridiculous, we need to solve the health care problems.

So quit the griping already, folks. If you're not careful, you could be next.

Posted by: slyness | February 24, 2009 4:00 PM | Report abuse

I had a great aunt (in both senses) who ended up with the name "Cooka", thanks to my Mom (God/FSM bless both their souls).

Apparently my Mom called cookies "cookas" when she was a wee one and my aunt was her cookie dealer. Whenever she saw my aunt, the first word out of her mouth would be "cooka". My Mom must have had considerable influence for a two-year-old because everyone called my aunt "Cooka" ever since.

Posted by: martooni | February 24, 2009 4:03 PM | Report abuse

I think that phrase doesn't mean what I thought it meant. According to those links Joel provided, "Moral Hazard" is more like "enabling." That is, it suggests a series of policies that encourage bad behavior by denying an individual proper retribution. The argument here is that rescuing people from their bad choices will just enable them to make more bad choices in the future. This is, of course, a very paternalistic concept because it assumes that people will always act like children.

What many people feel, including me sometimes, is closer to righteous indignation. This is more related to a sense of justice or fairness. Why should I suffer because of the foolishness of another. Considerations of future behavior on the part of the alleged fools doesn't really come into it.

The problem with Righteous Indignation is that it assumes a moral judgment, is hopelessly smug, and kinda mean. Who am I to judge another's foolishness? Especially since the fool in question might one day be me.

Posted by: RD_Padouk | February 24, 2009 4:14 PM | Report abuse

'Cooky' is a not common variant spelling I have seen several times. IMHO, it's too close to 'kooky' to not invite mispronunciation.

Posted by: yellojkt | February 24, 2009 4:16 PM | Report abuse

And, of course, when it comes to foreclosures, too much indignation will just bring the whole system down.

Posted by: RD_Padouk | February 24, 2009 4:16 PM | Report abuse

Unless you normally pronounce it like the Cookie Monster does.


Posted by: yellojkt | February 24, 2009 4:17 PM | Report abuse

Sara, because it comes from the Dutch word koekje or (informal) koekie. So they kept the "ie" ending.

I suspect as a general pattern, this holds true of all "ie" words versus "y" words.

Posted by: curmudgeon-1 | February 24, 2009 4:18 PM | Report abuse

Some of this righteous indignation ties into the parable of the prodigal son. I've always had problems with that Bible lesson as well as the parable of the field workers that get paid the same for an hour's work as the ones that worked all day.

Posted by: yellojkt | February 24, 2009 4:21 PM | Report abuse

Yes, it is close to kooky. I thought of that. And personally, I think "cooky" looks ridiculous, but that's because I'm used to "cookie" so I can't be trusted in that matter.

Posted by: Sara54 | February 24, 2009 4:23 PM | Report abuse

Nice. Knew I'd get an answer here.

Posted by: Sara54 | February 24, 2009 4:32 PM | Report abuse

Many people have a lot of moral outrage which they are expressing, sometimes vividly. I think there has been some confusion about "moral outrage" and "moral hazard". As RD notes, these things are not the same, though the latter may certainly give rise to the former.

There was a great deal of worry, beginning in the autumn when things first fell apart, that giving Wall Street and the bankers a bunch of money would constitute a moral hazard, that is, encourage them to keep making bad decisions. This may have been borne out by the travel/bonus arrangements which have since come to light.

However, the current majority of persons with financial difficulty no longer fall in this category. Rather than callous and greedy speculators, we're seeing people caught in bad circumstances. Perhaps they showed poor judgment originally, perhaps not, but there is no evidence that helping these citizens will encourage them to make future bad decisions. For one thing, they're not getting enough help to make them whole.

As the poster Joel quoted argued so forcefully, the problem is now extended to people and small businesses to whom banks will not lend, though they are eligible. They can't do anything about that; going in with a gun and demanding the loan will usually get you in trouble, even if you swear you plan to pay it back.

And as ScienceTim eloquently pointed out, even if one chooses to regard all those in financial trouble as idle undeserving grasshoppers, their trouble becomes the trouble of the ants very quickly. Unlike the ant in the fable, you can't shut the grasshopper outside to starve without affecting your own situation.

Posted by: Ivansmom | February 24, 2009 4:37 PM | Report abuse

Sara, my husband maintains that no-bake cookies are not cookies, because cookies must be cooked. He cannot be moved from this position.

Posted by: Ivansmom | February 24, 2009 4:39 PM | Report abuse

Woah. Woah, woah. No-bake cookies are the best kind of cookies. Like the Reese's commercial says, "Because no one should ever have to choose between peanut butter and chocolate." That is what makes them so good! Because they also don't make you choose between peanut butter and chocolate.

I once decided to make some when I was about 8. Being unfamiliar with cooking and ingredients I accidentally quadrupled the recipe. And it's just me and my mom at the point. Just the two of us. With about 275 no-bake cookies.

Posted by: Sara54 | February 24, 2009 4:47 PM | Report abuse

One thing to consider:

Most major industries claim *they* and they alone are *the8backbone of the economy: steel, Detroit, banking, Wall Street, service industry, whatever. But the truth of the matter is that the housing industry is the backbone of the economy. There was a piece a week or two back that showed that when the housing industry went into a slump, so did the rest of the nation; and when housing recovered, so did the country.

And although it was piss-poor banking practices and mortgage crapola that essentially caused this crisis, it was the housing industry that got crippled by it.
So insofar as this thesis is true, it behooves us as a nation to "cure" the housing industry as the primary tool to leverage the rest of the economy.

I'll be the first to grant that we may have to hold our noses while we do it, because some of the miscreants are going to wind up getting off the hook. But unpleasant as it may be, there it is: fix the housing industry (and that includes all the people with McMansions and granite countertops), and you start to fix the recession.

Also, I'll be the first to grant that the housing bubble itself was a major factor and a bad thing that should have (and to some extent *was*) foreseen. But be that as it may, no one is saying the housing industry has to return to "bubble" status, merely to "normal" status.

Posted by: curmudgeon-1 | February 24, 2009 4:50 PM | Report abuse

The biblical story of the prodigal son is there for a reason: we tend to constant jealousy and envy, always looking to see if we are better off, relatively, than others. This human tendency to "jonesing" is hard-wired. Economists and psychologists know this. However, we should rise about this checking-the-rear-view mirror envy. The "should" comes either from God or a body of tested wisdom. You choose.

At this moment, we will have to accept that some granite counter-four bathroom-hottubbing folk will be helped. Why not? To set up grids of exclusion will take time and we do not have that to spare. Many "god-fearing" thrifty sorts in the "starter" house or condo are poised to head over the falls without protection of a barrel. We must always tilt the system to toward the most vulnerable.

And, we might try to be loving, as that is the other lesson of the prodigal son: the lost one is returned and we will feast in joy, delight, and sheer relief.

I do hope that we re-jigger the economy away from the excess, paper wealth, go-go speculation toward dampened wealth/income differential, lowered real estate processes, and sustainable job sectors. How about a better distribution of income, modest markets for things best traded in markets, and an honest, transparent reliance on government and independent sectors to distribute the resources that resist market allocation.

A gal can dream, as she slouched toward midlife and retirement at, say, 2056.

Posted by: CollegequaParkian | February 24, 2009 4:51 PM | Report abuse

The Obama code: This is well worth the time to read:

Posted by: slyness | February 24, 2009 4:58 PM | Report abuse

I took a home equity line of credit out to replace my windows (3) and balcony doors (2 sets) a few years ago. I knew that I could have gotten at least $100K, but I decided to get only $15K. One, the windows and doors were half of that, and two, I didn't want to take that much money out in credit, no matter how low the interest rate. I've been taking my own sweet time about paying it all back, and I don't owe more than $2.5K on the windows/doors. However, one of the treatises I subscribe to (and one of the ones I'm keeping rather than dropping the updates) has expanded so much that there are many more binders than when it first came out. The bill came to around $1300. After I decided to keep it anyway (holding onto my heart), I put that sucker on the home equity line, and felt exceptionally smug about it. I have, however, dropped a lot of my professional subscriptions. Mother Jones, on the other hand, will always be in my mailbox. Love that publication.

Well, finally. The crown princess of Sweden finally got engaged today to her boyfriend of 7 years. She'll be 32 in the summer, he's a few years older and they met at a gym in Stockholm when he was her personal trainer. Now he owns a buncha gyms in the area and he's spent the last few years "training" to be a member of royalty. He seems like a nice guy, really, and is from a very small village somewhere else in Sweden. The date is sometime in June, 2010. Gotta plan those big parties early. I was living there when the current King and Queen got married (and she looked much, much better before all her face lifts of the past decade or so). I was also there when the crown princess was born. She got fewer cannon shots than her younger brother. The law was changed after she was born to allow her to ascend to the throne based on first-born status, instead of her brother, who was born with his own, um, scepter.

But now after she gets hitched, her two younger siblings can get hitched. Always waiting in her shadow. Royalty is more than a bit anachronistic, I must say. It's not an easy life, and it's amazing that so many people appear to envy them so much. Well, the money *does* help, I suppose, but the rest of it is decidedly not to be envied.

Kinda fun to read about it, though.

Hey, Yokes -- getting closer!

Posted by: firsttimeblogger | February 24, 2009 5:08 PM | Report abuse

What about her brother, ftb? Give me a link?

Posted by: Wilbrod_Gnome | February 24, 2009 5:13 PM | Report abuse

The brother is now learning to be a farmer down in the south of Sweden. Some old guy left him an old farm in his will recently. He's had a relationship with a young woman for about 10 years now.

The links, alas, are in Swedish:

There might be some stories that you can get in English, though.

It might help to give you the names, perhaps: Crown Princess Victoria, Prince Carl Phillip and Princess Madeleine.

Posted by: firsttimeblogger | February 24, 2009 5:24 PM | Report abuse

Looked it up on Wikipedia, ftb. Carl Philip was first in line for 7 months before the constitutional amendment passed to allow Victoria to inherit on the basis of being the oldest, period.

Much cleared up now.

Posted by: Wilbrod_Gnome | February 24, 2009 5:34 PM | Report abuse

The consensus, then, is that a moral hazard is a lateral one: penalty stroke, and a drop adjacent to the hazard. Treating moral hazard as a lost ball (stroke and distance) is being overly punitive.

Who's away?

Posted by: engelmann | February 24, 2009 5:42 PM | Report abuse

Forget it... the Marshall is telling us to pick up and move on to the next kit.

Posted by: engelmann | February 24, 2009 5:44 PM | Report abuse

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