The H1N1 virus first emerged in Mexico and soon spread into a global pandemic. But there is another pathogen more lasting and damaging to the health and well-being of society. First diagnosed in the 1600s, moral hazard disease is a condition caused by protecting people from the consequences of their actions. The recent economic crisis has launched a full-fledged moral hazard pandemic.
The spread of a disease requires both vulnerable victims and mobile carriers. The original victims of the financial crisis were low-income Americans who, aided by their government's "a home for all" policies and by mortgage brokers earning bonuses based on volume, took on mortgages they couldn't afford. The carriers were Wall Street investment bankers who, aided by scandalously unprofessional credit rating agencies, earned even bigger bonuses for packaging these toxic loans and selling them to a second set of unsuspecting victims.
Then came governments, the most effective disease carriers of all. Again starting in the United States: bank, insurance company and auto bailouts placed those whose actions helped cause the pandemic in the same or even better position than those who had acted prudently. Soon after, governments in the United Kingdom and Western Europe were infected by moral hazard disease, backing failed banks with sovereign credit that provided them with a cost-of-capital advantage over those banks whose prudent capital ratios and lending practices had immunized them from the pandemic.
Moral hazard disease doesn't strike only individuals and companies. It's most virile and devastating strain strikes the governance of an entire country. Greece - with its dysfunctional governance, out-of-control deficits, bloated and unaccountable public service, business-crippling bureaucracy and institutionalized corruption - has long been a prime example. Its immediate crisis is that €25-billion ($35.3-billion) of public debt must be refinanced in April and another €30-billion before year end. No sane banker is going to participate without seeing a clear reversal of Greece's upward spiralling deficit.
Yet denial of responsibility, the classic symptom of moral hazard disease, is virulent in the country. Commenting on the skyrocketing costs of Greek credit-default insurance, Finance Minister George Papaconstantinou told reporters: "Any European country can fall prey to speculative forces." Meanwhile, public-sector unions paralyzed airports, schools, hospitals and government offices protesting government proposals to merely freeze salaries. Rather than face the reality of the country's impending economic collapse, union leaders are betting that fear of collateral damage from a sovereign credit default by a euro zone country will push the European Union into bailing out Greece. Such action would inevitably lead to bailouts of the EU's other over-extended members, including Spain, Portugal and Italy.
While other trembling EU leaders support such a bailout, German Chancellor Angela Merkel's government understands such action could ultimately destroy the euro zone. German economy committee member Michael Fuchs summed up this sentiment by stating: "If we start now, where do we stop?"
There is a much better way to ensure the Greek moral hazard pandemic doesn't infect the whole euro zone: Cut them loose. And there is a very strong argument as to why this is justified. Greece has perpetuated a decade-long fraud that hid real debt ratios well beyond the limits that were a condition of euro-zone membership. And, mirroring the U.S. economic crisis, the enablers were Wall Street investment bankers.
In 2001, shortly after Greece was admitted to the euro zone, Goldman Sachs devised a way to hide billions of dollars of borrowings from view. The government traded away streams of future revenues such as airport fees and lottery profits under a Goldman-designed structure that disguised otherwise disclosable debt as a currency trade. And Goldman president Gary Cohn and team arrived in Athens last November with another financing plan that reportedly would have pushed the country's health-care debt off the books. Fearing it might not get away with the same ruse twice, Athens rejected the deal.
The bottom line is that Greece entered the European Monetary Union hiding a far larger debt and deficit than permitted under admission rules. This Greek tragedy is playing out while athletes in Vancouver pursue the high ideals of ancient Olympia. When competitors are caught cheating, they are tossed out. Modern Greece has cheated its way into the euro zone, and it should face the same rules its ancient citizens passed on to the world.
The economic crisis has triggered a series of bailouts protecting companies, individuals and unions from the consequences of their actions. Now countries themselves are expecting to be relieved of that responsibility. An EU bailout of Greece would surely lead to the rampant spread of moral hazard disease deadly to the future of the world's largest economic zone.