Stephen Foley: Moral hazard – the bogeyman of the hour

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The Independent Online

US Outlook: Moral hazard is not confined to banking.

It is the bogeyman of the hour, the notion that businesses take more risks when they know that they will be bailed out when the going gets sour, and as well as outraging the general populace (who, in the case of banks, are the ones who fund the bailout), moral hazard also profoundly distorts the economy. Capital is hardly being allocated most efficiently, to the activities that really will add profits and jobs to the economy over the long run, when one becomes divorced from the consequences of one's actions.

I was talking moral hazard with the founders of 37signals, a little Chicago tech company, this week, a duo who have made a name arguing that start-ups should never take venture capital money. The way you prove a business, they say, is to get customers to buy something, not to wow an investor, whose motive is to flip the investment to another buyer in the future (which may or may not be the same thing as creating a profitable company).

To my mind, Google has corrupted the technology space, by prosletysing a philosophy of "build something wonderful now, and worry about making money from it later", and by becoming a buyer of last resort for start-ups, relieving entrepreneurs of the need to build sustainable businesses. The 37signals have started highlighting "profitable and proud" small tech businesses on their corporate blog. Three cheers for the counter-revolution.