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Marketplace: What Is “Moral Hazard,” and Why Does Silicon Valley Bank Have Us Talking About It Again?

From Marketplace: The fallout from Silicon Valley Bank’s failure has revived some of those financial crisis buzzwords we really, really hoped we wouldn’t have to say again. “Bailout,” “emergency lending facility” and “credit default swap” have reentered the chat. As has one of the more misunderstood terms in modern economics: “moral hazard.” Honestly, you’re not going to get a better example of it than this clip from “Seinfeld.” “The idea of moral hazard is when someone behaves differently, [they’re] less careful because they know that the consequences of their action are going to be insured,” said Tom Baker, professor at the University of Pennsylvania Law School. “They’re not going to bear the cost themselves.” The term gained traction in the 19th century, when fire insurance companies didn’t want to insure the type of person who leaves the kerosene lamp burning at home when they head out for the evening. “It was in sort of character underwriting and then in their mantra of ‘Never a gain through loss,’” Baker said. That was the original “moral” in “moral hazard.” But in modern economics, the phrase is more about how all types of insurance can create perverse incentives. Listen to the full episode at Marketplace.

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