Wednesday, July 16, 2008

Moral Hazard

Moral hazard is a term that is predominantly associated with finance and financial transactions. For example, in insurance, it “means that people may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.”

Lately I have been thinking of moral hazard and its applicability in politics. If we assume that political action is insurable against risk, then who would be the insurers as well as the regulators? More important who determines what the threshold of risk is and at what level to pull the plug?

As long as our branches of government remain weak in exercising their main mandate of providing checks and balances, the risk of moral hazard will most likely be there. The dangerous part is that, unlike business, the price we might pay for the risk associated with poor political action might be too painful.

Moral hazard in politics may lead politicians to take serious and poorly calculated risks given that they seem to be under the false impression of being bailed out (as long as they are in bed with the regulators). Little do they know that there is no free lunches, and the bail outs will one day accumulate to levels of claims for which the final bill is too expensive and the outcome is extremely hazardous!

4 comments:

Mohanned said...

Politics are all about power. The less you power is in-check, the more probable you will misuse it. Batikhi-you know who he is- is now out with a new security consulting firm. I wonder how he was bale to get the "3adam ma7koomeyyeh" or the "seera o solook" requirments ;)

Tallouza said...

Mohanned, the first lesson I learnt in my first economics class was that "there is no such thing as a free lunch". For those who are intoxicated with power, they should be reminded that the bill is coming. More important they should be reminded of my favorite Barbara Tuchman's quote:
“Three outstanding attitudes – obliviousness to the growing disaffection of constituents, primacy of self-aggrandizement, [and the] illusion of invulnerable status – are persistent aspects of folly”

Marvin the Martian said...

Bless you for reminding people that there is no free lunch. Robert Heinlein's recurring saying in his books was TANSTAAFL (There Ain't No Such Thing As A Free Lunch). That acronym was on the flag of the Free Luna State in the 2100s, in his future.

Tallouza said...

mtm, some of my friends accuse me of cynicism because I believe in TANSTAAFL. Go figure :-)