“It is often assumed that an economy of private enterprise has an automatic bias toward innovation, but this is not so. It has a bias only toward profit.” — Eric Hobsbawm

The first time I arrived in the United States as more than a tourist was in September 2008, to begin graduate school. It was a fateful time to land in the country: within weeks, the US financial system began to melt down.

In seeking to understand quite how this had happened, a term began to be used that I wasn’t very familiar with.

Moral hazard: In economics, moral hazard occurs when one person takes more risks because someone else bears the cost of those risks. (Wikipedia)

A lot of people were soon exposed to the idea of moral hazard. Whereas I was fortunate to be learning about it in academic setting, many others were learning about it as a consequence of their livelihoods disappearing.

Whether it was the collateralization of subprime assets by the banks — bundling up questionable loans and then offloading them (the banking equivalent of hot potato); or the realization by bankers that the Federal Government wouldn’t allow the financial system to fail (and therefore would bail them and their “too big to fail” friends out) — it seemed any way you looked at the Great Recession, moral hazard was everywhere.

Unsurprisingly, people were getting pretty mad at those that had exploited it.

Something about blaming the bankers didn’t quite square with the talk of moral hazard, however. Of course, there was no doubt that the bankers had profited in a circumstance in which they should not have.

But here’s the thing: weren’t they acting in an entirely rational way?

If that question doesn’t stop you in your tracks — then read it again. The most powerful financial organizations in the world were, for some perverse reason, being incentivized to behave in a way that ultimately caused a global financial meltdown.

How did this happen?

And was it a one-off, or symptomatic of a deeper sickness?