George Will

WASHINGTON -- Exactly a century ago, panic seized financial markets. The collateral for perhaps half the bank loans in New York was securities whose values had been inflated by speculation. Then on Saturday night, Nov. 2, 1907, a 70-year-old man gathered some fellow financiers at his home at 36th and Madison in Manhattan. The next morning, a New York Times headline proclaimed:

Long Discussion in His Library
Not Ended Until 4 O'Clock"

Both the Times and The Washington Post ("BANKERS IN CONFERENCE: Money Stringency and Remedial Measures Discussed in Morgan's Library") noted that bankers shuttled between meetings at Morgan's mansion and the Waldorf-Astoria (then at 5th Avenue and 33rd Street) in a newfangled conveyance -- an automobile. Working 19 hours a day, and restricting himself on doctor's orders to 20 cigars a day, J.P. Morgan seemed so heroic that the president of Princeton University, Woodrow Wilson, said the financier should chair a panel of intellectuals who would advise the nation on its future.

Six years later, however, under Wilson as the nation's president, the Federal Reserve System was created, ending the era when a few titans of finance could be what central banks now are -- the economy's "lenders of last resort." Central banks have been performing that role during today's turmoil in the market for subprime mortgages -- those granted to the least creditworthy borrowers.

The ill wind blowing through that market has blown two goods: The public mind has been refreshed regarding the concept of moral hazard. And the electorate has been reminded of just how reliably liberal Hillary Clinton is.

Moral hazard exists when a policy produces incentives for perverse behavior. One such existing policy is farm price supports that reduce the cost to farmers of overproduction, and even encourage it. Another is the policy of removing tens of millions of voters from the income tax rolls, thereby making government largesse a free good for them.

And this would be such a policy: the Federal Reserve lowering the cost of money whenever risky lending to a sector of the economy (e.g., housing) makes that sector desperate for lower interest rates. Many banks, hedge funds and other institutions have pocketed profits from their dealings in the subprime market. The losses are theirs, too.

George Will

George F. Will is a 1976 Pulitzer Prize winner whose columns are syndicated in more than 400 magazines and newspapers worldwide.
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