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The case for policy sustainability.

Article Excerpt
Should we worry about moral hazard while the house is burning? The discussion about economic policy is full of biblical metaphors, the language of water and floods, and of fire extinction during crises. Metaphors, even when not mixed, are often obstacles to the clarity of thought. That is clearly the case with the metaphor of moral hazard in trying to understand the current financial crisis. Instead of focusing on moral hazard, I prefer to use the concept of policy sustainability to argue that sustainable monetary, fiscal, and regulatory policies are essential for lasting prosperity.

Moral Hazard: A Bad Metaphor

Moral hazard is a metaphor, an expression derived from the economics of insurance. In that context, however, it has a precise meaning: it refers to a situation that arises when an insured agent acts irresponsibly to the detriment of others, as a direct result of being insured. The idea of moral hazard is certainly central to the economics of insurance, but the concept is not quite right when we try to describe the choice faced by financial regulators or monetary policymakers. Of course, we have heard hundreds of times the term "privatized gains and socialized losses," and...

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