From Robert Reich’s blog:

…the apparent end of the boom and bust cycles led us to assume the economy would no longer impose huge, unexpected, and arbitrary losses on large numbers of Americans. So we basically got rid of the safety nets. We abolished welfare, let unemployment insurance wither, and paid scant attention when corporations eliminated defined-benefit pensions and cut health insurance benefits. We even stopped worrying about the safety of small investors, allowing federal deposit insurance to shrink as a proportion of total savings…

(Emphasis mine.) You see, the funny thing about safety nets… they’re not really there for things you planned for. And while it’s true that in your day-to-day life you’d tend engage in riskier behavior with a net than without, applying that mental model of moral hazard doesn’t really translate to most of the decisions we make as economic actors.1 The biggest difference is transparency.

In daily life we develop a pretty good intuitive sense about the risks we face. We understand reasonably well that running across a busy highway is riskier than crossing at a crosswalk with the light. Or (taking the metaphor literally) we know that, should we choose to walk a tightrope without a net, there is a chance that a sudden gust of wind might unbalance us enough to fall. We make an assessment of the relative risk of that happening, factoring that into our decision to walk or not.

This works pretty well for a lot of the moment-to-moment, direct interactions we have with the world. But it takes surprisingly little indirection for us to get the risk analysis completely wrong (such as the risks of flying vs. driving). And when we’re talking about something as complex as modern markets, we don’t even know most of the risks that exist, much less accurately understand the probabilities and potential impacts. To make matters worse, for most of us the large economic decisions we have to make are fairly tightly constrained. We take the job we can get. We forego health insurance because we can’t afford it. We simply don’t have a choice about walking the tightrope.

It shouldn’t be a shock that the gutting of all the safety systems we’ve put in place over the last century has been at the insistence and urging of those who least need them. It’s easy for someone who hasn’t had to borrow money for over 20 years to say people should “take responsibility”. But the problem2 with that attitude is that markets, like many things in life, simply aren’t very predictable. And that means that things you have no control over can utterly wipe you out. Unexpectedly and arbitrarily.

The real evil lurking behind the curtain, though, is that the wealthy few responsible for, among other things, the subprime mess, do understand the risks, and gamble anyway, expecting to be bailed out because of their importance to the economy. And their risky behavior is one of the biggest risks to our individual economic stability — and one we have no way to gauge.

Robert Reich again:

The very rich, fattest investors, and the biggest corporations don’t need safety nets. Now that the booms and busts are back, the rest of us do.

  1. No, not that kind of actor. *They* don’t have money. [↩]
  2. Okay, ONE problem… [↩]