Moral hazard ?

Charles Brown CharlesB at
Sat Jan 6 10:21:30 MST 2001

>>> schaffer at 01/06/01 11:29AM >>>
[ bounced > 30 kB from Henry Liu, Part I ]

"Too big to fail" is the cancer of moral hazard in the US finance
system.  Moral hazard is a term in banking circles that describes the
tendency of bankers to make bad loan based on an expectation that the
lender of last resort, either the Federal Reserve domestically or the
IMF globally, to bail out troubled banks.  The term also applies to
bad loans made to borrowers that are considered "too big to fail" such
as GE, Citigroup, JP Morgan Chase or General Motors, or borrowers such
as Third World governments. In general, the principle of moral hazard
states that bailouts encourage future recklessness. Brady bonds to
bail out Latin debts are labeled instruments of moral harzard in some


CB: So, the hazard is to capitalist moral principle of letting the bankruptcies occur
as the market causes them ? Capitalist morality is that there must be some destruction
in the creative destruction of the market, and preventing destruction goes against
this morality, and is therefore a hazard or straying from this economic morality.

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