Founded Upon Moral Hazard

The New York Times, among many, has been putting out the idea of "moral hazard" this past week (When a Safety Net Can Lead to Risky Behavior). The notion is that the presence of a reliable, implied safety net can lead to risky behaviors.

Normally, the concern among the media is about the risk of poor people benefiting from some sort of safety net, so moral hazard is yet another club in the bag of political demagoguery used to beat on workers. Now, however, it's become a question of whether actions like the Bear Stearns bailout can lead to moral hazard. What makes this laughable is that the entire financial system is grounded upon moral hazard for the capitalist class.

Let's examine some cases from recent history. Japan's housing bubble burst around 1990, leading to at least 15 years of economic decline for that nation. Over the 90s (and particularly in 1995) several financial institutions were bailed out using taxpayer money, including Yamaichi Securities and Sanyo Securities – some of the biggest in the nation. After the Russian debacle of 1998, the U.S. stepped in to bail out one of the largest hedge funds, Long Term Management Capital. And, of course, a major role of the IMF is to help bail out failed investments throughout the third world, seen in particular following the Asian financial crisis of 1997.

All of these bailouts send a distinctly clear message: for those at the top of finance (i.e., the major players of the capitalist class), take as many risks as you like, the government is your insurance agent with low premiums. Let's not confuse this with some deviation from policy, though, for this is the very role of the government. The state's role has always been to protect the investments and property of the ruling class, even if the particulars of those investments change over time from one primarily based on land to one based upon capital.