THE BLOG
06/26/2010 05:12 am ET | Updated May 25, 2011

Whose Moral Hazard Is It Now?

A moral hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk. Looked at from another angle, moral hazard exists when an individual or institution will not take on the responsibilities of its actions thereby leaving another less informed or innocent party to deal with the damage.

Despite the recent shot across the bow of Goldman Sachs, you have to wonder how far the Obama administration and leading Democrats are willing to take this.

According to "The Big Short" author Michael Lewis and New York Times columnist Thomas Friedman on Sunday's Face The Nation, the answer appears to be: not far enough.

Here's Friedman:

The incentives are for both parties to milk Wall Street for massive campaign contributions. Therefore, they're on this knife edge between the interests of the voters - which is to regulate, bring transparency and some kind of limits to the banking system - and their own party interests, which are to milk this industry for all they can.

Agree or not with Friedman's metaphor, Goldman Sachs and JPMorgan Chase each posted first quarter profits of $3.3 billion and Citigroup announced profits of $4.4 billion.

According to Michael Lewis, that doesn't bode well for a healthy economy. Asked if things have changed for the better, Lewis replied:

Oh, God, no, nothing has changed. In fact, almost built into the bailout was the assumption that nothing would change for a while. We've been in the system for 18 months now where essentially the government is gifting the banks out of their problem. The last thing it wanted to do is to attack these firms' revenues with financial reform, [as] financial reform, if done well, will reduce the profitability of these enterprises.

So what should leaders of change do when their party members are faced with the prospect of losing their seats in November? What choice should the Obama Administration be making when they know the Supreme Court has gifted corporations with the option to spend at will on political ads?

What if instead of taking small pot shots at behemoths of Wall Street the Obama Administration went for true reform? Would voters notice and reward it? Would we citizens and taxpayers -- who could well find ourselves once again bailing out banks -- vote in another Democratic majority if they were actually to do the right thing?

If the Democratic Party leadership bets the nation wouldn't have their back, does that somehow make the right thing in financial reform the wrong thing? Wrong, that is, in the societal risk that would ensue from Republican control of two-thirds of the federal branches.

Is it okay to wave a finger of indignation through the front window at the too-big-to-fail bankers collecting their huge bonuses -- but later swing by the back door to take that tainted money for political campaigns? Isn't there a clear right answer here?

Answering this question may prove the Obama administration's moral hazard as ultimately they will be praised or blamed. And the way things are going, if we're to believe Lewis, Friedman and our own eyes, we will pay for the wrong choices for generations to come.

Dr. Reardon also blogs at bardscove.