Monday, May 14, 2012

Moral Hazard

Daily classes from morning to the evening , limited parking lots annexed with blazing hot weather is an endurance test for every students at any point in time. Honestly, with this worrying attitude of procrastinating, entering classes early is a rare occasion for me. 

Well, this post is not mainly about grumbling on how typical college life would be. Perhaps it is on what I found when I was browsing through the news feeds on Times Mobile (It is what I normally do when I find the subjects in class particularly boring and unmanageable, pardon me for that). I stumbled upon a short article commenting on moral hazard.

The term moral hazard you will quite likely find it more often used in the financial world. Moral hazard is defined in the books as a situation where there is a tendency to take undue risks because the costs are not borne by the party taking the risk yada yada yadaaa. 

Don't get the idea? Let's put it in a simple way, just imagine a rich kid getting $50 bucks for his daily expenses. This kid wouldn't bother to save a tiny bit of the 50 bucks everyday coz he knows his parents will give more if he runs out of money. (Please enlighten me if there's a better example than this)

"I want my $50!"

Here's an extract from Times on JPMorgan Chase & Co and its CEO, Jamie Dimon ;

(For those who may not know, JPMorgan Chase is an American multinational banking corporation dealing largely in financial securities, investments and retail banking. If you want to know more you are welcomed to utilize the good function of Google.)

"....What if the loss had been larger? What if JPMorganChase were teetering on the brink of failure? Well, we would have to bail it out, of course. The financial system simply could not handle the collapse of one of its six largest institutionsof higher earning ; the economy would once again crash.

The term of art when a bank reaches the size where it is too big to fail is moral hazard. That means bankers will tend to act less responsibly if they know the government won't allow them to go under, if there are no real risks in risk...."

This article was referred to the loss this corporation made in the very sort of proprietary casino gambling that led to the financial crisis 2008. Okay, if the terms are getting too jargon, you may not bother more. 

What I'm trying to say is moral hazard is not an attitude we would only find within the confines of office spaces and men with black suits. We all have it too, and unknowingly, we could have done it in our everyday life ; being irresponsible.

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