The Lessons of History – and Moral Hazard
"Olim habeas eorum pecuniam, numquam eam reddis: prima regula quaesitus" (Once you have their money, you never give it back: the 1st rule of acquisition) The U.S. Savings and Loan crisis of the 1980s and 1990s was the failure of 747 savings and loan associations (S&L's) in the United States. The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government -- that is to say, by you and me, the U.S. taxpayers, either directly or through charges on our savings and loan accounts. This contributed in a major way to the large budget deficits of the early 1990s. The resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse-selection incentives compounded the system’s losses. Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk....