There has been a lot of talk in the media recently about moral hazard when discussing the repayment of loans. What exactly does it mean and why should we care?
Moral hazard occurs when a person who is partly protected from risk, behaves differently than they would if they were fully exposed to the risk.
The name ‘moral hazard’ originally comes from the insurance industry.
This occurs where a party has insurance and consequently is not as concerned about protecting their asset, because it is insured.
In recent media debates, it has been mentioned in regard to people who took out large mortgages or loans and are now unable to pay them and expect the government to step in and help them out.
All parties who take out mortgages and loans must do so in a responsible manner and accept that there is a risk should their circumstances change.
The government did not entice people to take out large mortgages and consequently, why should the government (via the tax payer) now have to come to their rescue?
How do we make sure it doesn’t happen again?
