President Obama Moral Hazards

Armstrong Williams

3/8/2011 9:04:20 AM - Armstrong Williams

Unfortunately, President Obama does not understand the basic laws of physics. Newton’s third law of motion states that for every action there's an equal and opposite reaction. Nor does he understand the basic principles of economics including the law of unintended consequences and creating a “Moral Hazard”. A moral hazard is created when a person behaves differently than he would have if he had to bear the risks of his behavior.

Every time Obama attempts to repair a problem by government intervention, he creates a more serious problem. An example of the law of unintended consequences is the President’s attempt to solve the financial crises by increasing the regulation of the American financial system.

These attempts overtime "to fix and regulate" the financial markets have resulted in the loss of U.S dominance in the financial sector. The most recent egregious example of this loss is the potential German acquisition of the iconic NY Stock exchange.

Another example of the law of unintended consequences includes the stimulus spending programs that fail to create additional jobs but result in the ballooning of our national debt. The stimulus spending took money from the efficiently run private sector in the form of higher taxes and reduced availability of debt and spent it in the inefficient public sector. Jobs created by public sector spending merely displaced jobs lost by forgone private sector spending. There are too many moving parts to the American economy for one individual, even a very smart one, to consistently predict the outcome of government intervention in the economy.

The President has created a number of moral hazards by trying to bail out Americans whose risking behavior got them into trouble. An example of the moral hazard being created in Washington is the attempt to relieve monthly mortgage payments of families in economic distress whose mortgages are under water. As a result of this program, taxpayers who lived modestly, saved and did not over-extend themselves with excessive mortgage debt are being asked to subsidize their profligate neighbors who bought bigger houses than they could afford.

The most egregious moral hazard has been created in the financial and business sector where companies and banks that are “too big to fail” have been bailed out with taxpayer money. These institutions include GM, Chrysler, Citibank, Fannie Mae and Freddie Mac. Institutions that paid fat bonuses to executives and outrageous benefits to union workers were rescued by taxpayer money when they should have gone bankrupt. With an institution that is “too big to fail”, it is “heads, I win” with risky behavior; and “tails”, the taxpayer looses when risky behavior results in financial losses.

Of course, the President isn’t the first to be struck with this malady, but it seems to affect politicians more than any other group. Part of the reason is that they are always beholden to their base and the interest groups that financially support them. This causes them to constantly overlook the ways policy harms the whole of society in favor of helping the small group. Then there is the fact that politicians regularly get upset when the Congressional Budget Office and independent commissions call them on the detrimental consequences of the latest policy, only to be told they are wrong and to come back with another answer more suited to that politician’s sensibilities.

Is it too much to ask our President to consider all the ramifications before shoving another ill-advised policy down the throats of the American people? We’ve seen time and time again that Obama is slow to come to any conclusion or policy decision like in the Afghanistan surge and addressing both the crisis in Egypt and Libya. So why not take the time to examine all the outcomes first? Then have an honest discussion with the American public about the pros AND cons of a decision. Not only will it force the President to deal with unintended consequences, but it would also elevate the public discourse by creating a more informed electorate.