What are the Ethics of Interest Rates?
SCOTT SIMON, Host:
Joe, thanks very much for being with us.
JOE NOCERA: Thanks for having me, Scott.
SIMON: Now, in the eyes of critics, how has the Fed encouraged moral hazard?
NOCERA: FDR was trying to revive the economy. And by putting all sorts of - sort of safety stops and guarantees and things that gave people confidence in economic life, many, many, many economic conservatives said this is terrible because it takes the risk out and allows people to do things they wouldn't otherwise do.
SIMON: How does the Fed balance these strings of responsibilities? On the one hand, they're supposed to, you know, essentially stand back and let the economy, on its own, establish a normal functioning, safe and secure bases. Yet on the other hand, they are there to protect the economy.
NOCERA: The critics basically say the economy wasn't that bad. You're overreacting. And, you know, you basically should allow a little pain because that will help remind people, the next time around, that this is what happens if you take too much risk and get too giddy in a bubble.
SIMON: The last time I think I heard the term moral hazard applied so dramatically was, of course, following the terrible losses in Louisiana and Mississippi after Hurricane Katrina. When the issue was raised, it was moral hazard at work when all kinds of different agencies enabled the development of coastlines that people knew at one point or another would be vulnerable to hurricanes.
NOCERA: And put New Orleans aside and just talk about the coastlines, and you can make a pretty strong argument that that government program has given people the feeling that they can live on the coast, their house can be wiped out, and they will be, in some way, made whole. Is it better to have people get federal flood insurance and live on the coast, or would we, as a society, be better served if the federal government says we're not going to do that, you're on your own if you live on the coast. That's what makes it such a tricky and interesting and difficult question.
SIMON: Joe, thank you so much.
NOCERA: Thanks a lot, Scott.
SIMON: Joe Nocera who has a column in Saturday's New York Times.
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