Moral Hazard Sense Watch

James Surowiecki talks sense on moral hazard, expressing scepticism that it is worth all of the caution that is being thrown its way. An example:

The moral-hazard argument also assumes that the most important factor shaping corporate decisions is the interest of the company as a whole. But, more often, what’s shaping those decisions is the interest of individuals, and on Wall Street those interests are often only loosely connected to the long-term health of companies. The fact that people can reap enormous rewards for decisions that are beneficial in the short term but costly in the long term is likely to lead to reckless behavior, regardless of whether companies are bailed out or not. Even if we allow Citigroup to fail, after all, Chuck Prince, the former C.E.O., will still have walked away with a package reportedly worth more than seventy million dollars.

[DDET Read more] That said, in my opinion, he goes too far in this concern:

Deposit insurance can make depositors less vigilant about the quality of banks, increasing the likelihood that bankers will make bad gambles with depositors’ money, as they did during the savings-and-loan crisis of the eighties.

But maybe there is a study on that episode that I haven’t seen.

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