By socializing risk, in other words by making others pay for someone else’s mistakes, we make sure those risks will be taken again and again. From Simon Black at sovereignman.com:
Several years ago back in 2004-2006, if you had a pulse, you could borrow money from a bank to buy a house.
In fact, bank lending standards were so loose back then that there were some infamous cases of people who DIDN’T have a pulse who were still able to borrow money.
That’s right. Some banks were so irresponsible that they actually loaned money to dead people.
Of course, it turned out that lending money to dead people… or people with terrible credit who had a history of default, was a bad idea.
And the entire financial system almost blew up as a result of this reckless stupidity.
But then something even crazier happened: the Federal Reserve came in and bailed out all the banks with trillions of dollars of free money.
That was utterly nuts. Instead of being wiped out by their idiotic mistakes, the banks learned that they would always be bailed out no matter how stupid or greedy they acted.
The key lesson was that there would be zero consequences for bad behavior.