Moral Hazards in the Marketplace

Exterior moral hazards abound these days.  From individuals to financial institutions to sovereign nations, it seems that there is an increasing need to be bailed-out and to have debt forgiveness.

Moral hazards most often occur when parties who are largely insulated from risk behave differently from the way they would normally behave if they were fully exposed to the risk.  Or put another way, moral hazards generally result in risky behavior stemming from not having enough skin-in-the-game.

Too often individuals and institutions alike do not bear the full consequences of their actions, thereby, leaving other parties to bear the brunt of responsibility for the consequences of those actions.  Financial issues surrounding the marketplace are particularly rift with a variety of moral hazards.   Consider the following:

  • When J.P. Morgan’s CEO, Jamie Diamond, bought an imploding Bear Sterns in 2008, Diamond initially paid $2 a share as he was backstopped by the Federal Reserve for tens of billions of dollars. Unfortunately, when another investment bank, Lehman Brothers, found itself on the financial ropes it was too slow to act and to make the tough choices necessary to attract a willing suitor and/or to prepare for an orderly bankruptcy.  Fixated on waiting for a “Jamie Deal” that never came, Lehman sank, setting off a wake of far felt collateral damage.
  • Today, Greece’s debt will have to be restructured or defaulted.   Even so, as the European Union intervenes with Greece, it sets a dangerous precedent for Portugal, Ireland, Spain and Italy who will each be looking for a similar “Sovereign Deal” to come to their financial rescue.
  • In the case of the U.S. and the sub-prime lending debacle, a moral hazard occurred precisely because the players within it all profited by making imprudent loans, without bearing the burden of making good on the loans if they went bad.  From mortgage brokers who loaned money that was not theirs, to banks who sought to sell the investment risk on to others in the form of high-yielding mortgage-backed securities, prudent mortgage standards were shirked in exchange for profit as the risk was passed on.

Examples of exterior moral hazards regarding financial risk are abundant in a world where too many have lived beyond their financial means for too long.  “Too big to fail” has become commonplace nomenclature as the responsibility buck readily gets passed on to somebody else.  A recent article in the WSJ aptly posited a financial twist on St. Augustine’s infamous prayer, “Lord, make me financially chaste, but not yet.”

But might there be an interior moral hazard found within humankind that is more deserving of our attention?  The answer in the affirmative can be found in forgiveness and the subtle nature of sin.

Graciously, Jesus’ endless mercy forgives our sins if we are repentant and seek to turn away from our spiritual transgressions.  Trough reconciliation, our sins from morally wrong conduct and omissions can be wiped clean time and again.  Still, a tolerant attitude toward sin can result in risky, errant behavior, stemming from not having enough spiritual skin-in-the-game.

Recently, I told a good friend as I was driving to church to go to confession that I still struggle with many of the same sins that I did earlier in my life.  While I like to fancy myself as having become more spiritually advanced over time, the reality is that I too often regress back to spiritual laziness, banking on Jesus’ bountiful forgiveness to bail me out.  At times, it is as if a spiritual indifference fosters a careless attitude of “Well, nobody’s perfect and I am only human.  No big deal, Jesus will hopefully forgive me for that one too.”

A “spiritual bail-out” mindset can lead us to forsake obedience and the need for virtuous behavior.  If we are not vigilant against the occasions of sin we can carelessly take on too much spiritual risk.  Moreover, although God’s ocean of mercy is far greater than our collective scarlet sins that does not mean we can avoid the consequences of sinful behavior, both here and in the hereafter.  The truth is that sin offends.  It offends Jesus, often others and the very nature of our eternal soul.

In the end, internal moral hazards can be more costly than external, financial ones.  Therefore, dear Lord, please help us to spurn the seductive nature of sin and to recognize that our spiritual character is defined by how we choose to live life in the many present moments at hand.  And finally, may we also pray for the spiritual courage to resist our temptations, believing that St. Augustine can intercede in helping us overcome the prideful indifference found in the words “but not yet.”


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About the Author

Charlie Douglas is a senior vice president with a leading global wealth management institution. He is the author of two books: "Awaken the American Dream" and "Rich Where It Counts". Charlie also serves as the editor for a national journal on estate and tax planning. Charlie is a speaker on such topics as the pursuit of God and money and morality in the marketplace. He is a past Board member for Catholic Charities of Atlanta and is active at St. Brigid's Catholic Church with his wife, Lori and their daughter, Elizabeth.

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