Moral Hazard, the Subprime Market and the Nanny State

Foreclosures tick up a bit, and government officials are falling all over themselves to save people from themselves. Ohio is planning on issuing a $100 million bond to bail troubled borrowers out. See this article in USA Today for details. And now, Freddie and Fannie already under significant pressure for their financial shenanigans, are rolling out new products to deal with the fall out.

Fannie and Freddie innovating to help out is not as big an issue for me personally. Though, I suspect the political pressure being brought on them has something to do with it.

Here is where the moral hazard comes in though. If states like Ohio, or probably California soon, or even the Federal Government spend tax dollars to essentially bail out borrowers who made poor decisions, then what is the incentive for those borrowers or any borrowers to do their due diligence and make sure they can afford a home? There is none. This was not a failure of the private market. People made bad decisions, and companies made bad decisions in extending credit. The rush of politicians to shield people and companies from their poor decision is one step further down the road of infantalizing the populace.

This is bad from an economic standpoint because of the moral hazard, and how it distorts future market decisions, and even worse from a policy perspective because it reinforces the idea that the government is the answer to everything.

So, maybe next time, I have difficulty paying the bills, I'll send a request to my buddies in Washington, they can pay it for me. We can call it an earmark, after all, there's no reason I should starve because I spent too much money going to Vegas. (ed: is it possible to spend too little money in Vegas?)