Sunday, 13 April 2008

Moral Hazard

I'm quite pleased that someone brought the issue of moral hazard in my last post. Because to me it is precisely the reason why currently there is a debt of $15 million.

For those of you who do not know what moral hazard is, it is a 'behaviour' that occurs when someone KNOWS that he will not bear the full consequences of his action. (Notice my emphasis on 'knows'). So in the case of the housing debt we talked about in the last post, people are not paying simply because they know that there is nothing the government will do.

And this is also precisely the reason why we should have different sets of policies for different sets of people (and probably different sets of houses). At the moment, everybody (the poor, the rich and those in between) is paying the same amount of money with the same set of terms and conditions, which to me simply is not fair. And I also believe that this is the reason why any kind of enforcement is difficult because by 'punishing' one debtor entails the 'punishment' of ALL debtors, regardless of the economic status of the debtor. So, while sending a summon or court order or even confiscating the house of those debtors who are actually able to pay can be accepted as a just and a proper action, it is however morally unacceptable to do the same thing to those who are genuinely unable to pay.

Therefore I believe that my suggestion to write off the debts of those who are genuinely unable to pay i.e the poor and ONLY the poor, will not lead to moral hazard. The effectiveness however lies in the efficiency of the relevant agency to detect who is genuinely unable to pay and who is not and to be ready with the 'punishment' to those who are attempting deception.

Anyway, while the objective of providing a roof or a land for every Brunei household perhaps sounds simple, it does not necessarily mean that the policy needs also be simple (i.e. one policy, applies to all) which has proven that it is NOT simple at all. I believe nothing wrong with some creativity in policy-making as long as the objective is met.

There is a need for us to be clear with our national objectives; and every policy or every department or even every ministry must cater to each and every objective. From my humble observation presently this is not the case. Everyone seems to be trying to be a champion and meet its own objectives which most often do not tally with the national objectives. Oh well, what do I know? I'm just a student with loads of 'idealistic but not necessarily realistic' theories, ya?

Salaam.
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5 comments:

Anonymous said...

Moral hazard, as usual rises as a consequence of information asymmetries ie. the gov't not knowing whether these people genuinely cannot afford to payoff their debt or otherwise. Indeed, one simple policy is not plausible and inefficient. One needs to come up with multiple policies to accommodate those who really can't afford and those who can. I believe increase in transparency of their primary expenditures would be beneficial for gov't in tackling this problem ie. car loans, education spending, household income, no. of people in the household. This might not be easy as it sounds; enquires tight regulation, careful monitoring etc. This system might be costly to implement, but it will prove to be beneficial in the long term.

14 April 2008 at 07:17
ROGUE ECONOMIST said...

Exactly! It will be costly and difficult (perhaps at the beginning) but not impossible.

14 April 2008 at 16:36
Anonymous said...

One most fortunate and luckiest Bruneian family I know, not only could afford to pay their family members' Landless Citizens' scheme of repayment (full in cash!) but also could own a block of complex in a commercial development area.

First, the late father passed away (with a 3-acre plot of land title to his name) leaving behind a wife, a son and 2 daughters.

The wife of the deceased applied for a 1-acre TOL Gov't land (which eventually was later granted by His Majesty to be claimed as hers outright some years back).

The eldest daughter lives with her husband who in late 90s obtained a Class B house via the scheme for Landless Citizens. So did her younger brother and by sheer luck, both siblings are neighbours. The other sister is staying with her brother since she is not yet married. Having settled down nicely in 'government-given' homes, the family decided that the time had come to transfer their names as inheritors of the late father's valuable 'commercially- viable' plot of land. So by the stroke of luck, a property developer offered to build 2 blocks of 3-storey shop units.

One block had been bought over by the rich Chinese developer and the other block belongs to the most fortunate Bruneian family with a fleet of new cars in their homes due to the 'planned' windfall!

In their family quest for newfound wealth, 3 other unlucky people are being deprived of such homely dreams since they are not as lucky as the luckiest property owners.

14 April 2008 at 16:59
Anonymous said...

This is a simple lending business. You lend money against some consideration in this case a mortgage on the property or an assignment of salary or pension although you are not supposed to. AND, the borrower pays you back. If they dont, then start your collection process before letting your lawyers loose. HOWEVER, this processes is almost non existent in the housing dept or whichever dept supposed to.

I always believe we should let the experts do what they do best. Who are the best lenders in town? Why, The banks of course. Managing lending risk is their bread and butter. Why do you think the bankers are well paid.. :)

we should park all these risks with the banks. After all they are good at it and it also means business to them! Look at Brunei SHELL Housing Ownership Scheme. All Shell staff takes out a mortgage with the banks in Brunei whilst SHELL guarantees the loan against their provident fund and to top that off, the bank gets a charge on the property. Thats double protection for them.

HELL subsidises the interest payment BUT not the CAPITAL to build the house. That comes from the Bank loan.

SO you see, house gets built, interest gets subsidised, Employee happy, employer happy, contractor happy, everyone happy.

Now, for whatever reason, there is a default, the Bankers will not be sitting pretty. They will be the first to call the borrowers. Cos Its their job to do so! If not they will lose their job and the bank will get someone new to do their job.

We dont have to reinvent the wheel.. we can consider this model and emulate it to the housing scheme process. A bit of tweaking to the policy and landcode will need to be done if we want the bank s to playball.

The beauty with this is the govt need not fork out all that money to build these houses. Let the applicant raise this with the banks. The only thing they have to subsidise is interest payment. That way no capital at risk, just servicing of interest.. which probably works out to be a heft sum to haha..

Thats my 2 cents worth..

16 April 2008 at 15:09
Anonymous said...

I absolutely agree with unqualified economist on effectively, his (or her) pseudo free-market solution, in a free-market, democratic society.

However, one has to consider the political ramifications such a drastic change on the housing policy would have in Brunei - the inhabitants of which are already heavily dependent on the government providing well, virtually everything. Let's not forget that, virtually every government policy spewed out by our ministers has, at it's very core, the intention of maintaining political stability at a national level; much more so than many other countries. Even if it is at the expense of economic efficiency, which a free-market system, backed by government mandate, would ensure.

20 April 2008 at 07:52

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