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Moral-hazard problem solved, immorally

Posted by Christopher Shea  November 20, 2008 12:03 PM

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Michael-Douglas-Street_l.jpg
Obligatory Michael-Douglas-in-"Wall Street" photo

The bankers behind the credit-derivatives blowup suffered in the sense that they lost a large proportion of their wealth: Fewer planned-upon bonuses, substantial stock losses -- especially when they were invested in their own company, as most are expected to be, or required to be. But did they suffer in the way that a middle-class citizen who loses her home or job does?

Of course not: They still have millions (or hundreds of thousands) in the bank, and they lived high off the hog even as they were driving the economy toward the cliff. They don't have to give back those expensive vacations and second homes. Some slipped smoothly over to still-solvent hedge funds.

So the supposed lesson they "learned" is ambiguous, notes Matt Yglesias. Is it: I should have been more careful? Or: The bubble was going to pop sometime, so I should have spent even more when I had the chance?

Yglesias proposes a solution to the problem of moral hazard inherent in that scenario. (His assumption is that no regulatory scheme can anticipate all forms of future financial chicanery.)

My joking proposal at dinner last night was that you let firms operate totally unregulated, but with the proviso that if your company winds up needing a bailout at some point we'll take your family out back and shoot them.

"Now, admittedly," he adds, "you probably can't do that."

He adds an apt illustration, too.

Shades of William F. Buckley's proposal to legalize all drugs, but to execute anyone who sells drugs to a child or teenager.

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