Moral hazard - the idea that if we are not made to personally bear responsibility for the harm caused by our reckless actions we will be much more likely to act recklessly in the future - is one of the key animating ideas of conservative policymakers. As one example, the problem with American health care, they say, is that insurers, rather than individuals, bear the full cost of care, removing individual incentives to control costs and reduce spending. If only the markets were deregulated and costs devolved down to the individual level, they argue, America could reign in its out of control system. If only we relied more on markets and less on government programs and regulation, they say, everything would fine. Such are the magical powers of markets in their eyes.
Except, of course, when they are the ones who are going to feel the pain. Then, and only then, is government supposed to step in and save them:
NEW YORK (Reuters) - Stocks snapped a five-day losing streak on Wednesday, with the Dow surging nearly 300 points on optimism that a government plan to rescue ailing bond insurers is taking shape and could prevent billions more in credit losses.
The market also drew support from growing confidence that aggressive interest-rate cuts by the Federal Reserve could help stabilize the economy and support the beleaguered banking sector.Shares of insurers Ambac Financial Group Inc (NYSE:ABK - News) and MBIA Inc (NYSE:MBI - News), which backstop many of the riskier bets banks and their customers have made in credit markets, surged 63 percent and nearly 36 percent, respectively.
News of a meeting between New York regulators, bond insurers and their customers lifted the market out of negative territory in late afternoon, pushing the Dow and S&P up more than 2 percent by the close. That marked a sharp turnaround from earlier in the day, when the Dow and the S&P were each down more than 2 percent.
"The speculation that mortgage insurers could potentially get a bailout helped the market stabilize. That was enough to get the market going. There was no real silver bullet news that came through," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey...
During the regular session, Ambac settled at $13.01, up $5.04, while MBIA ended at $17, up $4.47, and the S&P financial index (^GSPF - News) jumped 6.8 percent, its biggest one-day percentage gain in more than five years.
The New York State Insurance Department met with bond insurance counterparties and policyholders, spokesman David Neustadt said.
"That (bailout plan) combined with the Fed push was really enough to get the financials running," said Rick Meckler, president of broker-dealer LibertyView Capital Management in Jersey City, New Jersey.
As conservatives love to remind us, this isn't the government's money, it is ours. We are the ones who will pay to bail out investors. We are the ones being asked to bear the full responsibility for their mistakes.
Had we carefully regulated the markets in the first place, of course, it is likely that none of this would have happened. But oh no! Markets must be free! Only they can create wealth! When government acts, it can only destroy!
Or not, it appears.
Government involvement in international financial markets is inevitable. The question is not if, but when. Do we act first in moments of calm to minimize harm, or do we wait until the harm is already upon us? Unless we are willing to allow our financial system to collapse, intervention is inevitable. It is not if, but when. The next time you hear someone debating the merits of more or less regulation, remember that.
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