Mitigate moral hazards: Be it finance or politics
1 min read . Updated: 14 Mar 2023, 11:58 PM IST
PremiumNew risks have surfaced globally within a span of days, thanks to an enlarged US backstop for bond-wracked banks and a pointed Aukus role in the Indo-Pacific. India isn’t much safer
The space to do as we please without having to bear adverse consequences is a luxury most of us gave up long ago. If someone else promises to pay for our errors, however, human nature exposes us to the moral hazard of reckless behaviour. This needs to be held in check, globally, but has gone up in the fields of finance, geopolitics and Indian public affairs. First, take finance. The response of US authorities to last week’s failure of Silicon Valley Bank (SVB) was to assure its depositors they’d get all their money back, while its shareholders would be wiped out and bond-holders squeezed hard. This way, SVB doesn’t get a “too big to fail" bailout; its owners will suffer for the folly of billions stuffed into bonds whose value got scrunched by last year’s reversal of the US Fed’s cheap-money policy as inflation broke loose. Yet, other banks might have to chip in for a depositor rescue; and anything that spreads losses around (but not profits) will likely tempt riskier bets as we go along. A bigger boost for moral hazard took the shape of a central-bank window opened to forestall further insolvencies of the SVB kind. For a tiny penalty over the usual rate, cash-strapped US banks can access Fed funds via loans against the same type of bonds—but at par instead of market value. It’ll stop bank runs, but this backstop amounts to Fed largesse. It also lets the pandemic’s near-zero rates masquerade as normal and weakens the incentive for banks to hedge their rate risks.
In geopolitics, the perverse effects of a back-up are more complex, but no less real. Consider Taiwan, a vital chip-maker which China covets but operates as a democracy that America has signalled its backing for. This week, the US and its Aukus allies Australia and Britain firmed up a plan that envisages joint deep-sea patrols in those waters, to be done by nuclear-powered submarines that don’t need to surface for fuel and reveal themselves. “Aukus has one overriding objective," US President Joe Biden said, “To enhance the stability of the Indo-Pacific amid rapidly-shifting global dynamics." Wary of being encaged navally by Aukus, Beijing has objected to any nuclear transfer to Australia. But the pact is going full-pep ahead. As analysts fear, the sense of security this would offer Taiwan could embolden it to act rashly and declare itself a sovereign state, which might provoke a Chinese invasion of the island and spark off World War III. Uncle Sam’s shield has led many others to play with fire—like Israel, most visibly, in an oil-rich region that just saw Beijing emerge as a strategic player.
India has had tight rules for banking safety and always opted for geopolitical neutrality, but that doesn’t mean we have less to worry about. Moral hazards abound. In Indian traffic, for example, confidence in getting away with dangerous driving rarely turns out misplaced. Likewise in other spaces where the fallout of dicey deeds doesn’t return to haunt doers.
In our public sphere, it’s the polarization of politics by religion that’s hazardous. It not only coarsens what passes for debate, but also tends to restrict the role of rationality in electoral results. Significantly, this ready fallback of faith-based popular support can hobble the will of political players to back even-handed justice, as already observed in some cases. This makes for perilous politics, especially if vote-catching incentives end up at odds with the axiom of equality. Some of this has been seen, too. To secure national unity, we must minimize this moral hazard. The risks we bear aren’t trivial.
