President Trump’s Moral Hazard

The left grows nervous as the new administration weighs a rollback of Washington’s role in regulating banks.

Tony Webster via Wikimedia Commons CC4.0
FDIC headquarters, Arlington, Virginia. Tony Webster via Wikimedia Commons CC4.0

President Trump is eyeing a rollback of Washington’s role in regulating banks — even asking “whether the president-elect could abolish the Federal Deposit Insurance Corp.,” the Wall Street Journal reports. The liberal outcry was prompt. “Trump Prepares to Wreck Economy,” the New Republic reckons. Yet the left ignores how reforming bank oversight could offer a path to restoring accountability in an industry liberals condemn for recklessness.

The key element to any deregulatory effort would be to rein in what’s known as “moral hazard.” That concept blossomed in the New Deal. It’s the idea that investors, and institutions, tend to act recklessly when there are no consequences for their actions. If a bank’s owners know that a government bailout is more or less guaranteed, what’s to prevent the institution from placing risky bets that a more conservative bank would eschew? 

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