In three different, recent op-eds, I’ve read that only during boom times should we worry about moral hazard — the idea that some actor will engage in overly risky behavior because he believes that he’ll be bailed out if the risk goes bad. The most recent op-ed to say this is Charles Goodhart’s, in today’s FT.
OK, I did worry about moral hazard in 1998 when stock prices peaked. And again in 2006 during the housing price boom.
Question: Instead of worrying, when is it time to “do” something about moral hazard?
It seems the answer is never. During boom times, no one asks for government to play Good Samaritan. And during a bust — like now — when there’s opportunity to tell negligent investors to “go swim in the lake,” we’re told, well, the time to worry about moral hazard is during boom times!
That’s another reason to call moral hazard the ”Samaritan’s Dilemma.”