The term "moral hazard" is being bandied about in commentary about the sub-prime mortgage woes currently roiling our financial markets. Columns from George Will and Irwin Stelzer among many others, warn against the interposition of
government bail-outs or federal pressure on lenders to develop rescue packages
for failing sub-prime borrowers. These bail-outs fit the traditional definition
of moral hazard as "an insurance problem; when the cost of a disaster is reduced
with insurance, people have less incentive to avoid the disaster."
I have to agree that I think more damage would be done attempting to save these borrowers and the loan holders than allowing them to go under. The best solution other than that in my advice would be to set up a program that can assist loan holders in getting control of their debt so that they can make the payments.
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