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The phrase, ‘moral hazard,’ can support injustice or justice

Nancy Minard, Editorial Team

On first hearing, the phrase “moral hazard” seems straightforward enough, but it grows murkier as more people use the term to explain why some measures could not be used to help solve problems connected with our current financial mess. 

It has become a buzz phrase: one of those terms used to impress hearers without conveying any real information.

On one news program, an interviewer asked a banker about foreclosures on homes.  Because foreclosure is a costly procedure for everyone involved, and banks are having to sell foreclosed houses on the current depressed market, why not re-negotiate the mortgage with the people being foreclosed on if they meet the requirements for a mortgage at the new price? 

“Moral hazard,” was the grave reply.  Because these people had already failed to carry through on a contract, it would be a moral hazard for the bank to negotiate a new contract with them, the banker said.

The term becomes murkier as more interviewees take refuge in it. 

Some prefaced their remarks with a variation on, “Let me be perfectly clear about this.”  As soon as we hear that we can be pretty sure that we won’t be hearing any useful information.

A trip to the dictionary resulted in actual information. 

There “moral hazard” is defined as “risk (to an insurance company) arising from the possible dishonesty or imprudence of the insured.”

Further digging, especially in Paul Solman’s online business column with PBS’ Newshour, revealed that the term has been around since the 1600s, and  is primarily concerned with the idea that the behavior of the insured may change in a way that raises risk and cost for the insurer.

The idea is that the “don’t-worry-it’s-insured” type of thinking might result in a person’s being careless about locking his car because it’s insured against theft.

However, that kind of thinking can go both ways. 

Credit default swaps that seem to have been understood by only three or four people in the financial industry were meant to insure those who granted mortgages by passing the risk on to the buyers of the swaps.  Their success depended on the market’s never going down, just as the Dot-Com bubble depended on the stock market’s never going down during the 1980s. 

Were the credit default swaps a moral hazard?

They were if we take the term literally.

What if we adopt the term?  How might we use it? 

It has a solid ring to it that carries implications of evildoing. 

What if we take the term literally and apply it liberally to situations that do violence to compassion, social justice and the greater good?  Here are some examples:

• Genocide is a moral hazard no matter where it is practiced, against a minority in Darfur or gays and lesbians in Uganda.

• Usury is a moral hazard whether it is practiced by a loan shark or by a credit card issuer.

• Using public office for private gain is a moral hazard on any level of government.

• Propagating widespread fear that interferes with making decisions on reforms to improve life for the average people is a moral hazard.

• Creating roadblocks and polarity that interfere with civilized discourse is a moral hazard.

How do we avoid moral hazards?  How can we use words to support justice?

We go back to looking at what we need to do to nurture and protect compassion, social justice and the greater good.