The (im)Moral Hazard of COVID Amnesty

 Moral hazard is a term with which most folks outside of the financial services and insurance industry are unfamiliar. However, it is a concept which is key to having a good understanding of why our elected officials and government bureaucrats at the Federal level do such a terrible job of doing their jobs. Moreover, unless moral hazard is greatly reduced at the Federal level, this country is in peril economically, militarily, and socially.

So, what is moral hazard? Investopedia provides a good definition in saying that moral hazard “exists when a party to a contract can take risks without having to suffer the consequences.” Traditionally, this was understood to apply to written business contracts, loans, or insurance policies. However, it is abundantly clear that it exists in the sphere of governance and social contracts as well. Unfortunately, it also seems to be present on an epidemic scale that threatens to destroy this Republic, and it is getting worse.

Its effects are currently being felt and seen nationwide in the form of high and rising inflation, as well as in the increasingly dysfunctional policies of the Congress, the Cabinet secretaries in the Executive branch, and in the actions of various bureaucratic agencies that seem to act without regard to the law, due process, or even the knowledge or approval of the President. Our system has let moral hazard become a commonplace throughout our governmental institutions and processes. That is incredibly dangerous to this Constitutional Republic.

The best example of a moral hazard that almost all Americans saw and understood to be an issue without necessarily knowing that was what they were seeing, occurred during the great financial crisis of 2008. If you had told the average American that the government was allowing banks all over the country to lend hundreds of billions of dollars to people without regard for their ability to repay the loan, they would have almost unanimously agreed that such behavior was a very bad idea. If you then told them not worry because the banks were issuing those loans with Federal insurance backing them up so that the banks would be able to dump those loans back onto the government and the taxpayers if all those unqualified buyers defaulted, the average American would have said it was an even worse idea and should be stopped.

Of course, no one asked the American people their opinion, and the banks were making money hand over fist generating loan applications from unqualified buyers, and the federal bureaucrats who should have been auditing the applications to ensure that buyers were able to repay the loans could not have cared less because they are guaranteed to have a job for life. Moral hazard existed in every step of the process, but the assumption was that because Americans were really good about paying their mortgages in the past, the idea that Americans would not pay their home mortgages on a large scale was considered laughable.

Furthermore, if some Americans did do that and the banks had to repo a home or two, the value of those homes would continue to rise, and the bank would just sell it and get their money back. Presto!! Even if moral hazard was present as folks took on too much debt, the combination of Federal insurance, American honesty, and an ever-rising American real estate market would make sure that no one was left holding the bag, except, of course, the abstract “American taxpayer.” And what kind of enforcement power does he have? The answer sadly,  is practically none.

Of course, we know how this gigantic moral hazard ended up. With borrowers, bankers, Federal loan agencies, and home builders all convinced that they could “take risks without having to suffer the consequences,” they piled up an enormous amount of debt and nearly imploded the world banking system when the US real estate market collapsed. Not only did US real estate drop in value nationwide for the first time since the Great Depression, American mortgagors also walked away from their mortgages en masse for the first time. The Federal government may not have had a choice, but the decision made at the time was to shelter many of the primary players in this disaster from the consequences of their bad choices. The Federal government bailed out profligate borrowers; careless and reckless lenders; and turned a blind eye to negligent and incompetent auditors in its own house.

So, what did the primary players in that last debacle learn? The banks and borrowers plainly learned that no matter how reckless or incompetent they might be, there was a very good chance they would get bailed out by the government. Not only that, but they would also not face jail time, financial losses, or even lose their jobs for their incompetent and arguably criminal actions.

What did delinquent federal employees learn? That their chance of getting fired for not doing their job is practically non-existent. From theHill.com:

Meanwhile, federal workers face a 0.2 percent chance of getting fired in any given year. That is more than 45 times lower than their private sector counterparts. While full time federal employee compensation and benefits are above market, at least these figures are relatively transparent and accountable. Apr 14, 2019

So, the bad news is that Federal banking auditors and inspectors are terrible at their job, but still will not be fired. The good news is that they have great pay and benefits. Is the moral hazard in this situation painfully obvious?

Earlier in this article, inflation was referenced, and it is quite easy to understand what caused inflation; massive government spending, coupled with interest rates held at zero and QE, combined to ignite the worst inflation since the 1970s. What is even more unforgivable is that the Biden administration massively accelerated government spending even though it knew that inflation was already too high.

The Federal Reserve Chairman gave Biden’s team cover by agreeing with Treasury Secretary Janet Yellen that inflation was “transitional” and continuing to keep interest rates low as well. As the midterm elections approach, good conservatives can only hope that a massive number of Democrat politicians lose their jobs as a result of the inflationary escalation we are experiencing.

That would be a reduction of moral hazard that could pay dividends for years, but plainly, the Democrats who pushed this economically ruinous policy felt that there was no risk to them. They believed that they could take an incredibly reckless action with impunity. Now, despite facing what looks like a catastrophic mid-term elections outcome, Biden is doubling down on stupid by spending even more money and demanding that oil companies reduce the price of gasoline!! Plainly, the repudiation of himself and his party is not a “risk” that matters to Uncle Joe, so moral hazard remains a huge problem in the Executive branch.

Moral hazard is plainly in play at the White House, but one cannot be sanguine about the state of things in the rest of the Deep State apparatus either. Worse, no less a media fixture than The Atlantic is proposing making it worse. It recently published a piece on the government’s COVID response in which called for a blanket amnesty for any decisions made during the pandemic that cost people their lives, livelihoods, health, and/or freedom. In The Atlantic’s eyes, decisions were made with less than complete information (when is that ever not the case?) and in the heat of a worldwide crisis.

Ergo, they should not be held responsible for any bad decisions that were made!!! Is it possible to think of a more massive moral hazard than this? Signal to people they will not be held accountable for lousy decisions and horrible outcomes because they did the best they could and that is all we can ask of them? In a world where moral hazard did not exist, bad things would still happen due to human errors of judgment or misinformation, but that is NOT a reason to protect those people from the consequences. They should still lose their jobs, get demoted, even be prosecuted if it is warranted because doing otherwise increases moral hazard.

Coaches in professional sports get fired when the wind blows the wrong way. CEOs and owners of companies that suffer losses due to their decisions get replaced as well. Cops who make bad decisions go to prison or lose their jobs, but not federal bureaucrats. Anthony Fauci was the highest paid bureaucrat in the Federal government. During the pandemic he made mistakes of monumental proportions that increasingly look like decisions that cost thousands of lives and uncountable economic losses.

States and countries that did the exact opposite of what Fauci recommended did as well or better than those that followed his ill-advised recommendations. Fauci’s minions at the CDC backed him to the hilt even when it was obvious that he was lying, had incredible conflicts of interest, and was plainly incompetent. Guess what The Atlantic main concern was in their article on COVID amnesty? It was saving Fauci from a Republican led witch hunt. Odd, they have had no problem with Democrat led witch hunts for the last 6 years.

Now that we have discussed moral hazard in various situations, is it not obvious that the last thing we should do in the wake of the abysmal failure of our COVID response is announce that no one will be held responsible for that disastrous failure? It is not a question of sending people to jail, although in Fauci’s case that might be the outcome of a thorough investigation, but people should lose their jobs for such a debacle. It happens all the time in every segment of our economy, except the government. Is it any wonder that the federal government never gets any more efficient or ethical?

Even more concerning in the long term, is that as people see the example of their leaders and government officials getting away with corruption, dishonesty, dereliction, and incompetence, they will begin to adopt those behaviors. In a society in which religious affiliation is declining, families are splintering, and community ties are weakening, the government becomes a de facto ethical role model. If the idea that a wholly unaccountable, consequence free organization with a track record of malfeasance, incompetence, inefficiency, and lawlessness being responsible for setting our moral compass scares you, welcome to the club.

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