The recent of bailout of Bear Stearns have fanned the flames of class warfare. Personally I’ve yet to make up my mind if the bailout is a good thing or a bad thing. I don’t know enough about how Bear was tied up with other firms, and what it’s failure would’ve implied for the market as a whole. Without knowing all those facts it’s impossible to know what effect the collapse of the firm would’ve had on the entire financial market.

I’m not opposed to government intervention despite my seeming rant on the Fed’s Term Auction Lending Facilities. I think the Government has important role to ensure the market behave smoothly and fairly. I believe that role includes helping the neediest Americans so that they can get a leg up, and assisting the financial markets when they run into trouble that has the potential to cripple not only the US economy but the world economy.

Many people like to view bailouts of financial institutions through the prism of class of warfare, just as some of differenint political stripes view government assistance programs through the other side of the same lens. I certainly have my own politics, but see problem with neither. I believe what’s good for the goose is good for the gander. However, I’m probably more worried about moral hazard than treasury secretary, Henry Paulson.

Moral Hazard is typically used when talking about Insurance (and that’s really what Government intervention is). The classic example is that drivers may drive more dangerously when they know they’re covered by auto insurance. Moral hazard is not isolated to insurance. Moral hazard exists in many different situations in which the person or institution does not bear the full repercussions of risky behavior. In the case of Bear Stearns and other financial institutions, the moral hazard is that they will take on too much risk in lending and investing because they know the Government will bail them out in the end. Personal and Corporate Bankruptcy laws offer the same kind of perverse incentive to take too much risk.

I argue that moral hazard exists and is something that we need to be vigilant about. I do however agree with Paulson that we shouldn’t avoid action only in order to avoid moral hazard. Safety nets such as the government guarantees of Fannie Mae and Freddie Mac benefit consumers by lowering borrowing costs. Other insurance such as unemployment benefits help American workers stay on their feet in times of need. The crux of insurance and the conundrum of moral hazard is that risk is potentially socialized from the reckless to the prudent. This is the cost of being in tightly knitted and constructed society. Most of the time, I believe the benefits outweigh the costs.