Out there in the world of people buying, selling--and losing--homes, where "foreclosure" is a word we're hearing as often as people in high school hear "acne," a different, odder phrase is re-entering the language: "moral hazard."
The idea behind this phrase is that people should learn from their mistakes, the hard way. If people take out mortgages, they can't afford, let them lose their houses. They'll know better the next time. If banks make bad loans, let them lose money, even (in the extreme) go out of business. That will teach the remaining companies a lesson. It's called "the discipline of the market," and people who talk about that discipline sound like stern parents, while people using the phrase "moral hazard" sound like the book of Proverbs: spare the rod and spoil the child.
Of course, it's hard to take a strap to a child when he grows to be bigger than you are. The bigger the bank, the harder it is for the Federal Reserve, the Treasury Department, Sen. McCain, and other stern parents to whip it into shape. So we, the taxpayers, bail out Bear Stearns, with many more billions of dollars to come out of our pockets soon. And no one seems to worry that we're teaching bankers the wrong lessons, or that their moral fiber will wear thin as they become dependent on government handouts. As F. Scott Fitzgerald said, the rich are different.
Let's let this blatant hypocrisy pass, for now. Here's what I'm wondering. Is losing your shirt (or your house) the only way a person can learn from experience?
Turn your gaze away from the financial landscape and train your sights on a smaller scene: the world of nonprofit organizations. I work in such an agency, and I read the literature about nonprofits. The buzzword in our field isn't "moral hazard." It's "the learning organization." Managers of nonprofit organizations are supposed to give their employees lots of room to come up with new ideas and try them out. Only with experiment, goes the theory, will we learn how to do anything new. Instead of disciplining staff who try something that fails, we are to support them, think with them about the lessons learned, and try to do better next time. We all learn from a plausible mistake. The whole agency will be better off for the knowledge gained in the experiment--knowledge we would lose out on if we discouraged people from trying something new...OR punished them for failure.
Isn't this peculiar? In one sphere of human endeavor, we assume people only learn from being punished. In another, we believe people only learn when they are free to fail without penalty.
Of course, this is too general. People who come up with lots of ideas in an innovative company get promoted even if a few of them don't work out, as long as the company makes money overall. And you certainly can't try just anything at a nonprofit. Our funding sources see to that, by tying down the use of the money in restrictive ways that a corporate manager would never accept.
Still and all, I am left wondering if "moral hazard" is really the right way to look at financial matters either. Perhaps people who commit fraud are immoral and have to pay for what they've done. Even people who are unethical--not revealing their real personal finances, or not disclosing the real terms, and risks, involved in an investment--might need a spanking. But people who tried to realize the American dream of homeownership and trusted their lenders too much? That sounds like a self-help book, not a crime. They should be on Oprah, not in the poor house. There's no chance that most people who lose their home, or even come close to it, are going to run out and make the same mistake. They don't need the discipline of the market. They need the chance to learn from their mistakes, which means they need a second chance.