During the bail-out of AIG, Fannie Mae and Freddie Mac – and, at the time of writing, the still unresolved debate over the bail-out of the entire US financial system – the phrase “moral hazard” has become popular, typically in conjunction with the phrase “privatising profits and socialising losses”. It’s easy to sympathise: the erstwhile masters of the universe seem to have forgotten the meaning of both “moral” and “hazard”. Why should they be helped now?

Still, we might usefully remember what the antiquated jargon “moral hazard” means. The term originated in insurance, recognising the idea that people with insurance may be careless – for example, paying for secure off-street parking looks less attractive if your car is insured.

Moral hazard can sometimes take extreme forms. According to the Florida newspaper The St Petersburg Times, in the late 1950s and early 1960s, more than two-thirds of insurance claims for the loss of a limb originated in the Florida Panhandle. At the epicentre, “Nub City” – the tiny town of Vernon, Florida – almost 10 per cent of the adult population had lost a limb. One man was said to be insured by dozens of companies when he lost his foot; fortunately he had been carrying a tourniquet at the time of the accident. He pocketed a million dollars. Another man shot his foot off – “while aiming at a squirrel” – just 12 hours after buying insurance. Now that’s careless – and that’s moral hazard in spades.

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October 4, 2008 3:00am in Undercover | Comment