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The Weekly Winning Thought

The Unintended Consequences of Moral Hazard

By March 26, 2023No Comments

“Don’t be concerned for your own good but for the good of others.”

-The Apostle Paul (1 Co 10:24)

If you’re following the financial headlines these days you’re hearing the phrase “moral hazard” used a lot, specifically as it relates to the recent bank failures that are sending shockwaves through the economy. It’s a term used in economics and finance to describe a situation where an individual or institution takes more risks because they do not bear the full consequences of their actions. In other words, moral hazard occurs when one party has an incentive to act recklessly or irresponsibly because they are protected from the negative consequences of their actions. These individuals who are insured against certain risks may behave differently than those who are not insured.

If the leaders of a financial institution know that the government will bail them out in the event of a financial crisis, why not take on excessive risk since they won’t have to bear the full cost of their actions? This is what happens when a few go off the rails and affect the many. When caution is thrown to the wind by a few, the many reap the unintended consequences of the few.

Winston Churchill spoke of “the many” and “the few” as the antithesis of moral hazard when he made the following statement on August 20, 1940, about the bravery in the face of adversity of the Royal Air Force pilots during the battle of Britain: “Never in the history of mankind has so much been owed by so many to so few.” The pilots were fighting against overwhelming odds to protect Britain from invasion. The “so much” referred to the debt owed by the British people to the pilots for their sacrifice.

Although the term moral hazard was first used by economist Kenneth Arrow in 1963 in his seminal work, “Uncertainty and the Welfare of Economics of Medical Care,” it’s been happening since Adam and Eve’s unilateral decision to eat the fruit of the forbidden fruit.

When a few do bad stuff that affects the many, policymakers and regulators often take steps to mitigate moral hazard, such as by imposing penalties or restrictions on risky behavior or by requiring individuals and institutions to bear more of the costs of their actions. Jesus did the opposite. He took steps to mitigate mankind’s moral hazard by offering God’s grace (see what is grace?). He bore the costs of our actions. While unworthy and undeserving, Jesus redeemed us from the penalties and restrictions that entered the world through Adam, and restored us: “In Him we have redemption through his blood, the forgiveness of sins, in accordance with the riches of God’s grace (Eph 1:7).”

But wait a minute. Since Christ has mitigated our past, present, and future failures, does this give us a license to keep engaging in moral hazard? The Apostle Paul offers an emphatic “no”:

“So what do we do? Keep on sinning so God can keep on forgiving? I should hope not! If we’ve left the country where sin is sovereign, how can we still live in our old house there? Or didn’t you realize we packed up and left there for good? Could it be any clearer? Our old way of life was nailed to the cross with Christ, a decisive end to that sin-miserable life—no longer captive to sin’s demands! You must not give sin a vote in the way you conduct your lives. Don’t give it the time of day. Remember, you’ve been raised from the dead!—into God’s way of doing things.” (Excerpts from Rm 6:1-14 MSG)

The cure for moral hazard – and all other sins – is for our leaders, and you and me, to behave like Jesus. Moral hazard can’t occur if we are putting others ahead of ourselves. As Christians, we are called to act responsibly. We have the indwelling of the Holy Spirit that helps us behave like Jesus, even in the face of adversity. As believers, we have no incentive to act recklessly. We are incentivized to act paradoxically: “If anyone, then, knows the good they ought to do and doesn’t do it, it is sin for them (Jm 4:17).”

Prayer: Lord Jesus, help us to serve others ahead of ourselves, just like you did. Help us to vow to put an end to moral hazards that seek to rule our lives, once and for all. Remind us that our old way of life was nailed to the cross and that we are no longer captive to sin’s demands. Amen.

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