Moral hazards - and consequences
Applaud your kid for punching another kid - rather than grounding him - and you've created a moral hazard that means he'll probably punch other kids in the future. In short, without consequences - or worse, with rewards - for wrongdoing, there is an incentive to do wrong. That's moral hazard.
To date, the national discussion about this concept has revolved specifically around financial moral hazard. And, as evidenced by trillions of dollars in public loans, guarantees and subsidies given to speculators to cover their massive losses, leaders in both political parties have no interest in preventing financial moral hazard - despite stern press releases insisting the contrary.
But financial moral hazard is only half the story. The other half is political moral hazard - the mother of all other moral hazards.
Consider, for instance, Federal Reserve Chairman Ben Bernanke. He's the top regulator who not only sowed financial moral hazard with the Fed's post-meltdown bailouts, but openly admits that as the crisis developed, his Federal Reserve "should have done more - we should have required more capital, more liquidity (and) we should have required tougher risk management controls."
Firing Bernanke would tell other regulators that there are consequences for negligence. Instead, President Obama rewarded Bernanke with renomination and thus manufactured a pernicious problem. As economist Dean Baker says, just as bailouts create a financial moral hazard giving speculators no incentive to avoid excessive risk, Bernanke's renomination creates a political moral hazard whereby regulators "will not have an incentive to do their jobs properly (because) there are no consequences" for failure.
The Democratic Congress, of course, could reject Bernanke's nomination. But that seems unlikely.
When Senate Democrats ratified Obama's nomination of New York Fed chief Tim Geithner as Treasury secretary, they rewarded yet another shill who also fell down on the regulatory job. When those same Senate Democrats considered the nomination of Gary Gensler to head the agency regulating derivatives, they could have rejected him for championing derivatives deregulation as a Clinton official and then cashing in as a Goldman Sachs executive. Instead, Democrats backed his nomination.
And let's be fair - it's not just Democratic politicians who are creating political moral hazard. Many Democratic pundits, activists and voters continued cheering on President Obama while he stuffed his administration full of Wall Streeters.
Come election day, if there are no consequences at the ballot box for the politicians who legislated bailouts, supported these appointments and are now working to undermine proposed Wall Street reforms, then America will have created the biggest moral hazard of all.
David Sirota is the author of "The Uprising." E-mail him at ds@davidsirota.com.
This article appeared on page A - 124 of the San Francisco Chronicle