No skin in the game or moral hazard for the rich

Whenever there is talk about reducing payments or the amount owed for someone who is having trouble with their mortgage,economists will always say it’s problematic because of moral hazard. And when there are discussions about income taxes in the US, Republicans say that everyone needs to pay something so they have ‘skin in the game’. Of course, this doesn’t apply to banks (via Atrios):

Seven years ago a local savings bank persuaded Reyes, a cleaner, to take out a 100% mortgage to buy the flat for €195,000 (£157,000). The bank has since merged with half a dozen others, all of which had thrown bad money at property speculators, to form a sick giant called Bankia.

Last week, as Reyes waited for the bailiffs, Bankia was demanding €23.5bn of taxpayers’ money to stave off collapse. That is €1,350 from each working Spaniard. Among other costs that need absorbing by the savings banks that made up Bankia are a €6.2m payoff to one senior executive who helped drive the bank to disaster and €14m to another.

The banks who helped destroy the world economy are bailed out at public expense and the top executives who made the decisions keep all the money they made, while a lot of ordinary people lost their jobs and then their houses. What will stop future banks and bankers from making similar decisions?

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