Financial gurus warn against a potential 'moral hazard'

[Jun 3, 2008.]

Financial advisors, gurus, and leaders from all over the country are warning lenders, regulators, and the government about the potential backlash of a "moral hazard". With the circumstances of the mortgage crisis as it exists today, politicians are stepping up to demand that something be done about protecting consumers from the possibility of bad loans. But it's going to be a very difficult job protecting consumers without also bailing out those lenders and investor parties who were behind allowing those bad loan decisions.

However, financial masters are wary of bailing them out, citing the potential of a moral hazard, which is an economic and insurance-related term that represents how people act recklessly when protected by safeguards such as regulations and insurance. In the event that someone is either insured or given protection from something, that person will often do something reckless because of the feeling of being safe stemming from it.

Towards that end, mandatory protection from bad loans can make investors, loaners, and those looking to obtain loans even more careless than before, which can post a significant risk in the long-term when looking past the immediate benefits of any regulations that can be established either by the government or by lenders themselves.

In that sense, financial advisors say that the best course of action would be for borrowers to strengthen their sense of financial literacy rather than rely on the government for help. They recommend borrowers -- especially those that have lost their homes in a foreclosure -- to read their loan documents, ask questions, and even go as far as to hire lawyers or certified public accountants to give advice. That way, they won't find themselves either in the same rut as before or prevent themselves from falling into one in the first place.

As it stands, a majority of these loan-oriented businesses involved in the mortgage crisis accepted profits but tried to leave the "next guy" with the risks involved. The solution will be to figure out a way that addresses the current economic woes while establishing a standard that will prevent another such occurrence in the future.