Happy Holidays and Moral Hazards

One of the journalists whom I admire is Daniel Henninger of the Wall Street Journal. I look forward to his column called "Wonderland" every Thursday in the WSJ. He isn't quite up to the level of adoration I have for Peggy Noonan, but I do like what he has to say. His latest, "Mad Max and the Meltdown", is right on target.

He points out that, as the holiday season approaches, we don't say Merry Christmas, we say Happy Holidays. We fear that we will give offense to someone by use of the word Christmas. Instead we trivialize with the neutral phrase, Happy Holidays. How many other words do we not use anymore? How many subjects do we not discuss because we fear giving offense?

That is not to say that we should be yahoos, speaking without sensitivity to the concerns and differences among us. But because we do not speak of the things that matter, we have become a people who do not know the difference between right and wrong. We live in a neutral moral universe. That is not to say that we are not ethical people. We are indeed ethical, but ethics is a lawyer's word. Ethics is about following the rules, not about right and wrong.

CEO's took hundreds of millions dollars home in pay and bonus compensation from companies that were shortly to fail. But we shall find that they were following the rules. They may have fudged the truth from time to time, but we will probably find that their words were carefully phrased and their actions calculated to stay within the guidelines of their agreements by which they earned that money. I have every reason to believe that they were ethical.

At the same time, millions of everyday people seeking home loans lied about how much money they made, or how much money they already owed. But what do you expect on a "No Doc" home loan? Wink, wink, nudge nudge. Perhaps they were not ethical, but unlike morality, ethics is always weighted in favor of the rich and powerful.

Moral hazard is the phrase that our euphemism obsessed generation has coined to describe what happens when people do what appears to be ok and is expected behavior, yet is clearly wrong. In the discussions of the causes of our current meltdown, the thoughtful among us cite moral hazard as the cause. Moral hazard is endemic among us. Are you surprised when someone goes through a red light anymore? Are you surprised when you look down at your speedometer and see that you are clearly exceeding the speed limit?

Mr. Henninger's point is that our society, any society, depends on moral sentiments. Capitalism depends on the great majority of the people in the system being able to be trusted. Our culture is based on us knowing right from wrong, and doing the right thing most of the time. Capitalism depends on its participants being moral creatures. Otherwise we live with contracts and laws.

In my years as CEO of ForeRunner, I had to negotiate numerous disputes with clients. In none of those disputes was the contract of any use. In each case, we sat down and negotiated a settlement. Sometimes it took years and extensive legal maneuvering, but in the end, we sat down and accommodated each other. We resolved our dispute, recognizing that each of us had done wrong and that there was right in the other's position.

Without a moral framework on which we agree, how do we live? Mad Max gives us a picture of the alternative.