Moral Hazard

A frequent topic of discussion lately has been “moral hazard”. Someone who opposes using taxpayer money to bail out financial institutions usually invokes this idea. In this context, it refers specifically to the “no-lose” position that is created, and the gambling mentality that results, when any profits from lending money flow to traders and upper management and any losses are covered by government guarantees or insurance.

While I agree that there is significant hazard present in the current financial paradigm, I fear we are avoiding any serious examination of an even greater and more pervasive danger: lying. As the sub-prime mortgage debacle has been endlessly dissected to explain the trigger for the current difficulties, do you doubt now that there was anything short of massive fraud within lending institutions? Whether you blame the borrowers for taking on more debt than they could afford, or the lenders for enticing people into loans that exceeded their financial wherewithal, the fact remains that the system was gamed, usually with the help and guidance of the very people who we thought were tasked with preventing fraud. Few borrowers would know the criteria that had to be met when filling out loan applications, and so those “liar loans” needed the assistance of informed loan specialists in order to pass what minimal scrutiny passed for normal after 2003. Auditors had to look the other way as assets moved off of balance sheets. Rating agencies had to ignore common sense when they rated mortgage-backed securities without inquiring into the nature of the underlying assets. Insurers relied on ratings rather than due diligence when offering coverage, and assumed far more liability than was prudent or even reasonable. Management encouraged cheating and lying by basing bonuses solely on the volume of loans delivered, while completely ignoring the quality of those same loans. And even borrowers found the chance to own a home, the ultimate American Dream, so rewarding that they failed to question their new-found and inexplicable ability to join the dream.

But having seen that fraud was rampant, even by the admission of those in the very institutions that led the charge towards the financial abyss, we now must ask, “Three years into the recovery, where are the prosecutions?” Not a single person or firm: borrower, bank, broker, insurer, or auditor, has faced a courtroom appearance. We have accepted that lying is how we do business in America today. We fear a Wikileaks disclosure primarily because it documents how pervasive lying has become within government. Government lies to us and to everyone else around the world on a daily basis. That the government also feels threatened by having its lying confirmed is more proof that our core values and principles are founded on lies. What is more distressing, however, is that we the pot, should hardly be calling the kettle “black”. There are very few people in America today who do not lie. Oh sure, we excuse our lies by calling them “white” lies, or by invoking the “I don’t want to hurt your feelings” defense. “Does this dress make me look fat?” Of course not. “I’m a little short today, can you pick up lunch?” Sure, why not? Just like last week. “I didn’t get your voicemail.” Won’t it be nice when technology finally gets it together and works all the time?

And of course, we are taught from as early as we can remember that lying is OK. We learn by believing what we are told by our parents: by taking everything we hear on faith. We grant our caregivers high esteem, and take what they tell us as the gospel truth. This is what is so insidious about cultural stories such as Santa, the Easter Bunny, or the Tooth Fairy. We are told these fables while we are at an age when we believe everything we are told. The foundation of our world is shaken when, a few years later, we discover that there is no such person as Santa, no such late-night travelers as the Easter Bunny or the Tooth Fairy: that gifts are given and eggs are hidden and coins placed under our pillows by our parents instead of some fantastic, magical creature. I was just told by a friend who is a parent, about an event involving his 5-year old daughter. The two of them were watching a TV show, “Bones”, in which a person dressed as Santa had a bomb strapped to his chest which he detonated at a particular point in the show. It was a horrific blast, with blood and body parts flying everywhere. My thought at this point in the story, to be honest, was to question how appropriate this show is for a 5-year old. But unaware of my discomfort, he went on with the story. His daughter turned to him, with her eyes wide open, and asked in a disbelieving voice, “Is Santa dead?” He described how he is thankful that her 9-year old sister has not yet told her that Santa is a myth, and he perpetuated the lie by assuring his young daughter that, “This was only a man who looked like Santa, not the real Santa. You have nothing to worry about, sweetie.” Nothing that is, except how her trust in the world will shatter when she realizes she’s been lied to.

What other stories and ways of being are also a lie? And in what other ways are we domesticated, acculturated by myths (like the origins of our currency, or the invincibility of our military), or controlled through deceit? And how do we lie throughout our days, in order to get by with something, or to avoid showing the world our true selves? In a video clip on www.ted.com, Benjamin Zander tells a story from a survivor of Auschwitz. She was 8-years old when she and her family were loaded onto a boxcar and taken to the camp. As the train drew near, she realized that her 5-year old brother was not wearing any shoes. As only a big sister can, she yelled at him, “What happened to your shoes? How can you be so stupid as to lose your shoes?” These were the last words she ever said to him. From her family, she was the only survivor. As she walked through the camp gates to freedom following the liberation of the camp, she vowed that she would never again speak words that could not stand to be the last words she might say to someone.

Please examine your own words. Vow to never speak an untrue word again. We will all, of course, fall down as we attempt such a grand commitment. Yet, without trying, and without honestly learning from the mistakes that do happen, we will never be able to correct what is now a massive, pervasive, and inherent moral failure that threatens our civilization.

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