The real story of moral hazard is hidden behind the headlines that announced the trillions of dollars given to businesses and investors that were categorized as “too big to fail”. Free market principles were sacrificed so that failed and inefficient companies could survive. No one can disagree that those companies salvaged by the government’s generosity will have a tendency to take still greater risk at some future time, and will, once again, endanger the economic health of our country. But, there remains a greater moral dilemma that contaminates the social standards of the people of our nation.
The real quandary lies in the hearts, minds and pocket books of the hundreds of millions of Americans who were not entrapped by the euphoric wind song of greed that created the economic maelstrom. While their neighbors were investing more than they had in the promise of future wealth, the frugal majority saved their money and invested it on the advice of financial planners. Even as they heard the tales of instant riches accruing to a timely “flipping” of an investment, the conservative masses held fast to the time honored tradition of “a penny saved is a penny earned”. Many thought that the dramatic increases in home prices was a result of market hysteria and choose to stay on the sidelines of what ultimately became known as a giant asset bubble. They thought themselves to be safe, but they have come to realize they are the biggest losers in the current economic calamity.
The financial losses are dramatic for those who had avoided the rush to riches. Foreclosures and the dramatic decline in home values have made homes priced at fair market near impossible to sale. Those who saved money find themselves unable to get a reasonable rate of return because the government is holding interest rates low to salvage the financial institutions that created the crisis. Those who invested in seemingly safe investment portfolios have been decimated by the stock market collapse that accompanied the housing and mortgage crisis. In summary, those who did the right thing are being punished while those who behaved irresponsibly are being rewarded. This is the real moral hazard which, left unchecked, will permanently scar the minds of those who recognize the irrational irony.
And what effect does this all have on the future? As one comes to realize that the old values of saving for a rainy day no longer make sense, who will continue to play the fool? Why would one hesitate to venture into risky situations if the government will save you from yourself?? And at some future date when the disease of irresponsibility has permeated America, who will be left to pay for the excesses of a society that has lost its moral and financial compass?