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Nikki Stern

Nikki Stern
Princeton, New Jersey, USA
April 10
whatever sounds good
Sure, come on in
Author of "Because I Say So: The Dangerous Appeal of Moral Authority" ( and "Hope in Small Doses" and busy blogger at


Editor’s Pick
MARCH 7, 2012 5:14PM

Warning: Moral Hazard

Rate: 32 Flag

“Moral hazard” originated as an insurance term used to differentiate between accidents caused by nature and those caused by humans. Nowadays, it’s used to judge and misjudge others according to whether we think they’ve assumed undue risk or cost us money.

My eye was caught recently by a business article in the “New York Times” about moral hazard and its relevance to our present financial calamities. The bailouts of banks and the proposed assistance to those who’ve defaulted on mortgage payments are being viewed in terms of “moral hazard.” That is, bankers and homeowners might well take undue risks if they don’t face consequences or if they can count on government bailouts.

The article details the various ways in which legal determinations about moral hazard (particularly by insurance companies) are haphazard and often dangerously backwards. For example, the author cites statistics that demonstrate that, contrary to popular opinion, the non-insured aren’t trying to grab more in the way of free health care. Rather, they’ll avoid the cost of treatment until they are dangerously or irreversibly ill and out of options.

The author equates the concept of moral hazard with our American idea of self-reliance—the idea that everyone should be able to put their houses in order (and not mortgage them to the hilt) and those who don’t lack discipline.

That may be. I’m feeling less generous with my fellow Americans these days. Instead, I sense a return to a judgmental, suspicious, parsimonious frame of mind that evokes the 19th century. Yes, moral hazard may be a term in use because of the current economic malaise. Yet the view of reckless irresponsibility appears to extend beyond the (sometimes willful) ignorance of a few but encompass the presumed cheating, sinful, and morally lax natures of most.

We are on the lookout for scoundrels and cheats an every turn. The unemployed are all seeking handouts. Illegal immigrants are never about hard work and trying to provide better lives for their children. They’re about swindling the government and taking what’s ours. Even women risk the “moral hazard” tag for seeking abortions or contraception instead of accepting the consequences of engaging in sexual activity.

As for gaming the system, it’s something the other guy does and it costs us, Mr. and Mrs. Taxpayer. Here we are, working hard for our money just so the federal government can collect it and redistribute it to welfare frauds, those illegals and scam artists, along with high-flying bankers and lazy government employees, sure.

In the land where one is innocent until proven guilty, we’re using a broad brush when it comes to moral hazard. We are incensed that the undeserving might collect what we worked for. During the debates over extending tax breaks, I got into a fierce online discussion with a friend whose divorce settlement provided her with an annual income in excess of $250,000. She was furious the government was considering taking some of her hard-earned money to give to people who were careless with their credit.

While I know she suffered through a great deal of emotional trauma with her errant and immature husband, while I sincerely believe raising children (she has two) is a worthy job, I thought her antipathy towards potential cheaters was telling. It’s like NIMBY (not in my back yard) times three.

I’m frankly suspicious of anyone who yells about “government handouts.” The truth is, we’ve all come to expect help when we need it, whether that help comes in the form of our judicial system, disaster aid, or, for most of us, public education for our children. Nevertheless, we quantify and qualify various government services based on who gets them and who we think deserves them. We continue to divorce social security from its original intent, which was as a safety net for widows and children, viewing it instead as our own government banking system, while we view Medicaid as something that goes to caring for “poor” people. We’ve enshrined the phrase “hard-working Americans” and defined it through imagery of mostly men with a few business-suited women engaged in mostly manual labor, with a few franchise owners, a sprinkling of contractors, farmers and members of the armed services, and the occasional cop or firefighter. Rarely do we associate “hard-working Americans” with public sector employees like teachers,  janitors or nurses, with housekeepers or gardeners (overwhelmingly minority), or with single mothers struggling to make a life for their kids.

Exercising moral judgment is never a good idea. We ought to realize how close we might all be to falling off the ledge of relative stability due to job loss or crippling family illness or unexpected natural or man-made disaster. We may suppose some people sin more than others. Since most of us are guilty of the most flagrant kind of hypocrisy when it comes to forgiving, we might hesitate before calling anyone out on his or her mistakes.

There have always been and will always be both enterprising thieves and irresponsible spendthrifts. I’ve no doubt a few of them are taking advantage of every possible opportunity, both public and private, for easy money or unearned gain. However, the “moral hazard” I’m most concerned about is the rise in this country of mean-spirited self-righteousness.

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Great post. Reminds me of the response that GK Chesterton gave to the London Times question of "What is wrong with society today?"
People would do well to substitute the term, 'incentives' and demystify the topic.

The real problem is the Left was delighted to turn the term around and point fingers at bankers.

And then, it was a free for all to apply it to as many groups as possible.

'Moral Hazard' is abstract, arcane concept that is seldom directly used by anyone in business -- and no one tries to quantify it, etc. Incentives are all around us and we are used to applying the concept, which is, at least in principle, quantifiable.
Thank you for this. The real Moral Hazard, of course, is the drive to repeal the small gains made by the Affordable Health Care Act.
I'm witcha on this, Nikki, but it might be wise to hedge our bets and invest in the clothing industry specializing particularly in black fabrics, the high-top hats favored by the Rev. Cotton Mather, square-toed black shoes with brass buckles and knee-length breeches with white knee socks.
Amen! Nothing is moral about it, is there? Powerful and accurate analysis of what they maliciously now call "government spending," i.e. social programs. A relevant insight in our flawed culture. Great post, Nikki. R
Another article today cited the G20 requiring the world's largest bank to submit their apocalypse plan. Banks are resisting.
So I should continue to steal from everybody and give to myself?

Awesome!! What? :D

'bankers and homeowners might well take undue risks if they don’t face consequences or if they can count on government bailouts"

For some unfathomable reason, too many of our not-yet-suffering citizens seem more concerned about moral hazard when in comes to homeowners than bankers.
Tom--you're absolutely right.
Chicken--I'm bringing on my "Handmaiden's Tale" outfit. That should do it.
Tink--why not?
Nikki---I went to my accountant today and discovered that I pay the same % of taxes as Mitt Romney. (seriously) I think there are moral hazard issues here.
I totally agree. Can't add another word to what you said.
I've given up being combative about these things- that was the reason I first started coming to OS, to let off steam by butting heads with a bunch of liberals. The problem is not so much "moral hazard" as willful blindness to the faults of one's Own Party and willful credibility about the evils of the Other party. It's not that I've grown tired of having a good fight every once in a while, it's that we really can't afford a fight right now- though that's what it's shaping up to be. My attitude is that we're all going to die when the Mayan calender runs out in December ( give or take 100 years; though I've heard speculation that the first “immortal” human may already have been born) so what the hell?

Here's the problem I present to you: We all know that “food stamps “ are “good” and “necessary “, right? So how do we administer them and who do we get to administer them? We get Obama's good buddy, Jamie Dimon and Chase Bank. And who does Chase bank get to administer food stamps? People who are paid $ 12 dollars an hour to answer a phone call every 2 minutes ( timed). Meanwhile Jamie and company pocket the big bucks for schmoozing the prez and contributing big bucks to his campaign fund. Would it be any different with a republican? Probably not, only not quite as hypocritical. My philosophy is to turn the rascals out every 4 years and put in a fresh set of rascals, at least that way none of them ever gets too experienced at it.

The moral hazard is in presuming to pay people to be compassionate. I worked for Chase for about 3 months, and I found myself daily, hourly on the phone with people who were having gut wrenching and heartbreaking crises of getting food right in my ear. I also listened to some of the most preposterous and outrageous lies I've ever heard in my life, – I remember the lady who called and her food stamp card had been “stolen”, and somehow used to purchase $700 dollars worth of groceries at a convenience mart. Get a Police investigation? They aren't interested. “Well Lady , you are well and truly screwed and and I'm not paid to worry about it, and my supervisor is winding his finger at me to get you off the phone, so you have a good day” That is typically what workers fall into after a week or two- and you have to tell yourself that she's probably just a conniving cheat who has a monthly “deal” with the convenience store to give her, say, $600 cash for $700 “Food” purchase. Or more likely her boyfriend or brother. To stay on the job, you quit worrying about it. Callousness becomes the norm. As it seems to be for a large proportion of government “compassion workers” – you can develop a real hard heart and tin ear if that keeps you making $12 bucks an hour in this economy. Jamie and his buddies make the big bucks for getting the government to give it to Chase.

I now volunteer with the homeless through our local church. The religion is “Methodist”, but jeez, we're the guys who use grape juice for communion. The basic “Faith” is in our community. We believe in US. Like the loaves and the fishes, we feed people and it's a daily miracle where the food comes from. More to the point, we get to exercise TRUE compassion, that benefits ( dare I say blesses?) both the giver and the receiver. Food stamps take the money the government takes from us by force, keeps a large portion for themselves, gives another large portion to their buddies, and pays disposable peons next to nothing to distribute “the gift” at a pace that makes the “distributor” harden any compassion he might feel, and makes those receiving it feel like thieves.

The “nutrition” dispensing machinery is still pumping out vast quantities of SOMETHING- but it sure doesn't sure taste like “Compassion”- tastes more like Soylent Green

What do we do about ? I honestly don't know- my answer would involve religious training that teaches compassion, and if I could put every kid in the country through our youth group at my church, I would . Not to be instructed in religion, To experience a true community of Faith. We believe in Us. So how do we get US to believe in us again?
It's always fascinating how so many people can get exercised into lather by the "welfare queens", the sub-prime mortgagors or the unemployed whose job-seeking efforts are wanting. Fair enough to crack down on abusers but they're a pittance compared to the moral hazard of being on the hook for the too-big-to-fail financial institutions. Yet you're looked upon as a crank and probably socialist if the latter if your focus. As for being against handouts, check out the countries with next to no social benefits versus those with more generous ones. Which model delivers a better life?
Moral judgment seems to be a good thing when turned inward to the self. This is one (of many) things about the present state of the media that bugs me. When we are encouraged daily to look into other people's bowls–details of their marriages, deaths, flaws, habits, fashion, beliefs and politics–then keeping our eyes on others, rather than ourselves becomes a practice, a training. We move from feeling entertained to feeling entitled to know. People have commented, on learning that I don't follow the news, that I must be uninformed. Is uninformed not knowing the latest thing in some public figure's bowl and passing judgment on it? If so, yes, yes indeedy.
$250,000/year? Can I divorce your friend's ex, too?
Stim, please do. I was pretty startled at the number but she was married to a doctor...not a writer ;-)
" However, the “moral hazard” I’m most concerned about is the rise in this country of mean-spirited self-righteousness."

I think that they are coming after our precious bodily fluids next. Well done and R!
"bankers and homeowners might well take undue risks if they don’t face consequences or if they can count on government bailouts"

The food stamp program, part of the Department of Agriculture, is pleased to be distributing the greatest amount of food stamps ever.

Meanwhile, the National Park Service, also part of the Department of Agriculture, asks us to "please do not feed the animals" because the animals may grow dependent and not learn to take care of themselves.
And since the reddest states take the most money, it becomes this sort of crazy-making situation. On the one hand, conservatives criticize what they deem (and only what they deem) a hand-out, including the nutty belief that Social Security is a hand-out and not, as it really is, you know, YOUR OWN MONEY. But while that hand wags a finger, it is evident from looking where the money goes that the other hand is eagerly reaching out for the cash.

It's just nutso.
Catnlion--Sounds to me like, in these tough economic times, the food stamp program is doing its job. Did you know that, statistically, most people are off welfare within two years? Yeah. I know. It doesn't fit with your world view. Oh! And did you know the majority are white? Ahhh!!! I know!! So crazy. Also, only 9% are underage mothers. Eek! Where is the welfare queen?

It appears, from the statistics, that most people use welfare as it should be used, as a temporary measure to get back on their feet. I know. I know. You "know a person who ...". Look, that's nice and all, but it's anecdotal. Actual statistics from the census are a bit different. It's gotten slightly higher and longer during this economic depression, but the overall statistics suggest that, once there is a job, most will leave the welfare program. Thank goodness the Republicans are all about that job creation ... oh wait ....

Then you wouldn't mind a couple of restrictions, say limit the amount of time you can collect to 2 years in every 10. How about once you are on, there will be no modifications for having more children etc.

I don't mind a safety net. Then again there is the lady in MI that won $1 million in the lottery and is still collecting. Her excuse, she has two houses now and she still doesn't have a job.

Who cares what color they are? This isn't an issue of race. Every race can play the game. Why are you trying to make this a racist issue? Do you have a problem with white, and other races, being part of the safety net?
From an early age, I remember riding with my mother as we delivered food and checked in on people who had fallen victim to wide-ranging circumstances... didn't matter to Mom the reason, she simply saw folks in need. I asked her once, as we rode from house to house,why she did this. She always brushed my hair out of my eyes when she was about to impart a tender answer.
"Because we have more than we used to have because Daddy has worked so hard. Me and Daddy feel it's our responsibility to help others when they need help."

The word that resonated was "responsibility." I remember seeing Dad help out homeless people who would approach us on the street. My brother would say, "Hummph! he's gonna go get drunk Dad."
Dad would smile and say, "Maybe, but what if he's hungry...Son, you don't really know what hunger is."

I know I'm perhaps over-simplifying here, but I think so much of our seemingly insoluble problems come from the smugness and sense of entitlement among many folks participating in this economy. I see too many hard-working, honest people who desperately need help, and to suggest they are after a handout, is an obscenity, and an insult.
I had this same argument with a dear friend of mine tonight. Everyone ELSE was out to game the system, but every advantage she has had is deserved.

I know I don't deserve much of what I have. I was born able-bodied and intelligent. I was adopted by a family of (up-and-coming) means, raised a community with a diverse and highly-regarded public education system, encouraged to pursue a college education -- despite an unintended pregnancy and hasty marriage. My brother had the same advantages, but suffered from a fatal mental illness. Is burns me that anyone would look at my life as a moral victory and my brother's life as one big character flaw. If only he had tried harder...
When it rains it seems to pour and hopefully thats not your $$$$ going down the drain.

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Catnlion--Except you miss the point. With the vast majority, there is no need to limit the time. But, indeed, what could I expect? Even when confronted with the facts, you cannot budge from your lack of desire to share. We could institute this terrific idea wherein we realize that welfare is actually a great idea because it protects people, is more cost effective than other methods, and doesn't employ the repulsive belief system necessary for "let them die."
Oh, and on the racist comment, now, now, let's not be disingenuous about what the conservative line is about welfare. That makes you look dishonest.
Right on, Nikki. The last line of your essay says it all. Until one has walked in the shoes of someone who is truly deserving of (for whatever reason, mental illness, poverty, etc.) of the so-called "government hand-outs" we have no right to judge. Rated.
Great post. People who think they get nothing from others and take care of themselves and their families with no help are deluded. There is no way to live in a complex society (or a simple one) without interdependence. The economy and the financial system have flaws in them, and that tends to create havoc in a random fashion. It's an impossible job for us to decide who was "innocent" and who "deserved" losing their home or their job. What we can try to do is make the system work better so that it doesn't have regular breakdowns. That does involve curbing some people's greed, but it has to be about regulating transactions to reduce excessive risk-taking, not about making moral determinations about other people's financial decisions.
This is right on the money, Nikki. "Let him who is without sin cast the first stone." I particularly like your closing paragraph, and I know - maybe most do - someone who was once wealthy due only to family money - who is now destitute, but clings to her past status vowing to vote for anybody to get rid of Obama. R
you might cite your book on the subj, I have no idea why you didnt. you literally wrote the book. and Im sure this essay fits into that. but, I feel you have an axe to grind somewhat & dont understand the deeper issues. "moral hazard" is in fact a highly useful concept. you dont seem to notice that it can also be applied to the corporations that got bailouts. [I think the NYT article might have mentioned that]. there is increasingly a gap in capitalism between what it allows vs what it should allow. I suggest reading the books of john perkins for lots of eye opening info along these lines. "moral hazard" is a useful lens for looking at the disparity between what capitalism allows vs what it should allow. I suggest digging a little deeper. but I certainly agree that the abuses of capitalism led to our current predicament and that dubious use of insurance is at the heart of it. the failure of AIG which insured mortgages that were in some cases *not* owned by those buying the insurance is a subtle concept to most but highly relevant. insurance was used as a stock shorting mechanism. because the public cannot understand legitimate vs illegitimate insurance, this scam reached proportions of billions of dollars. the economist john hudson has good insight into what is called the FIRE sector of the economy (finance, insurance, real estate) which is *exactly* what caused the 2008 crash... the public still has not figured out why or effectively acted on it, yet it is increasingly obvious.
Loved this. Thanks, Nikki. /r/
Kudos from a former insurance drone. Well stated!
O - I don't know what conservatives you know that think SS is a hand out and NOT their own money.
Every conservative , in fact most people I know, including many liberals, think it is NOT a handout but a plan they specifically paid into.

But then this is Tom who believes it is a handout to anyone who paid in, if they have any other resources beyond a minimal living arrangement , food and clothes.

I would like to know what your source is.
Tom - lets you had $1M to invest. You make loans to say 5 people for 200K each to buy a house.

Are you going to want to risk your money on people you feel are risky because a court forces you to make that loan?

Would you want to gov to make you simply reduce the 200K principal to 100K and eat the loss?

That is the moral hazard. As you know home loans are really tight now in terms of qualified buyers. And why?
Well why would anyone in their right mind want to make a home loan now. It amazes me that any bank would.
Couldn't agree more. The balkanization of America has steadily been increasing as pockets of society refuse to interact with those outside their "tribe". Form gated communities to seeking like mined online communities and finding media outlets that reflect an intrenched worldview - we are losing the ability to empathize with people who are not like "us". The kerfuffle over Obama using the work "empathy" was an extremely telling moment. If I correctly recall, I think some even argued that empathy leads to moral hazard. Thanks for the wonderful post. Peace!
thanks for info nikki