The Dukes of “Hazard”

As the number of bailouts, the scope of bailouts, and talk of further bailouts have all increased over the last month, culminating in yesterday’s announcement of yet another in the asserted “Mother of All Bailouts” series – of Fannie Mae/Freddie Mac, then of AIG, and now of Citigroup – one thing has been missing.

Modifying the title of Tom Lehrer‘s fond recollection of Vice-President Humphrey, I’ve been wondering, “Whatever Became of Moral Hazard?”

Now no one would ever accuse me of being an empiricist, but this surely seemed a ripe question for quantitative study. Was it simply my imagination that no one seemed to be talking about the moral hazards attendant to young, newly appointed staff members doling out cash on the front steps of the Treasury Department? Perhaps my eyes were simply glazing over every time I came to the paragraph in the New York Times or Wall Street Journal pieces where they quoted some obscure academic economist, noting the risks attendant to bailouts?

Or perhaps not.

Consider the results of my exhaustive search for the term “moral hazard” in articles in Westlaw’s “USNEWS” database, of U.S. papers and news magazines, conducted yesterday morning:


1/08: 45

2/08: 117

3/08: 204

4/08: 122

5/08: 89

6/08: 113

7/08: 130

8/08: 96

9/08: 408

10/08: 172

11/08: 109 (to date)

Over the course of the entire year, some general fluctuation is readily apparent. The collapse from September to November is quite striking, however, especially when we consider the mounting scope of the government’s existing and potential bailout program during just that period. Driving the point home, consider that when I re-did the November search this morning – bringing in a day during which the Citigroup bailout was all over the news – the number of hits increased, by the grand sum of ONE.

Perhaps the explanation for the diminished talk of moral hazard lies in the fact that one can’t quibble over such niceties as moral hazard, at the moment when the sky is falling. Fair enough.

On the other hand, the sky will eventually be put back in place. And bankers, hedge fund managers, corporations, and investors will again need to engage in dispassionate assessments of market risk. Our response today, even as the sky is falling, can undoubtedly be expected to shape those assessments.

Perhaps the deeper implication of the lack of talk of moral hazard, then, is its decline as a useful analytic device. In the Brave New World of the U.S. financial markets (and even beyond, if the auto industry is next up for a rescue), the moral hazard created by public intervention may increasingly be no “hazard” at all. Rather, it may be the presumptive baseline. The timing of bailouts will vary, of course. The scope of the requisite crisis – and the resulting bailout – will be important. But the central question of moral hazard – the possibility of a government rescue – may have ceased to be an interesting question.

In the new marketplace, perhaps, bailout may be the new normal.

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