Shouty CNBC reporter Rick Santelli is freaked out by the "moral hazard" of Obama's mortgage rescue. Conservatives on Capitol Hill fret that bailouts will result in a new bubble. What is this misplaced financial moralism?

Previously the province of economists and insurers, "moral hazard" is making the headlines. It's the concept that a safety net encourages people to take more risks. Which, if you think about it, is exactly what we need at a moment when lenders aren't lending, investors aren't investing, and anything riskier than government bonds looks radioactive.

Today's bailouts are meant to solve the problem of too little risktaking, not too much. If one defines "moral hazard" as the encouragement of risks one would not otherwise take, then "moral hazard" sounds like exactly what we need. The only safe, rational action in today's economy is to hoard your money. Just as President Obama had to explain that an "economic stimulus" is by definition wasteful spending ("That's the point!"), bailing out banks and getting credit flowing is encouraging moral hazard by a different name.

The argument that the likes of Santelli are marshaling against a plan to prevent foreclosures is that homeowners in the future will expect a similar bailout, prompting them to buy houses they can't afford once more. And one can make a similar argument against any bailout measure. Indeed, people talked about moral hazard when the government took paltry half-measures against Wall Street's collapse. It turned out that handwringing over moral hazard was the real hazard.

The point that today's critics of moral hazard miss is that the market embraced moral hazard in the bubble. With no bailout plan in place, we all speculated as if someone would rescue us.

The nation's megabanks — JPMorgan Chase, Citigroup, Bank of America, and the rest — were deemed "too big to fail" long before anyone thought there was a real risk that they might. The financial industry manufactured moral hazard, with banks passing on the risk of the loans they made to investors and investment banks paying bonuses for short-term results regardless of the long-term risks taken.

The problem that today's opponents of "moral hazard" have seems to be that it is the government, rather than private enterprise, which is endangering our economic morals.

The worry is that bailouts will be bad for us in the long term. But in the long term, as one sage noted, we are all dead. We can ban government rescues in the long term, if they're such a worry. In the short term, the biggest hazard is too much moralizing.

(Illustration by Richard Blakeley)