A loss of faith in key institutions cannot be fixed with more cheap credit or subsidized mortgages.
Today's topic is important but a bit tricky; you may want to refill your beverage container before buckling in.
Moral hazard is the separation of risk from consequence. A person who knows they won't suffer the consequences of a risky bet gone bad will behave quite differently from a person who knows the full consequences of a risky bet gone bad will fall on them.
A person who is insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by someone else--for example, the Federal Reserve or taxpayers.
Correspondent Jeff N. recently alerted me to the equivalence of the perception of abundance and moral hazard. Jeff was responding to An Abundance of Bad Decisions(June 13, 2013), which noted that decisions made in the euphoria of abundance were generally bad because they were based on 1) projecting the good times would last for the indefinite future and 2) the Status Quo, having delivered abundance, was working fine and should not be challenged or changed.
As a result, both critical thinking and innovation atrophy, as neither are needed in times of abundance. Indeed, they pose an active threat to the Status Quo and are thus marginalized or suppressed. ...