Michael Brandl's Macroeconomic Update pt.1
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Would it be better to let market forces be the catalyst for any corrections, which might have included Bear Stears going away in a more cataclysmic function?
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No, what I am saying is that there is a "Moral Hazard" in the quasi-bailout of lenders and in the arranged buyout of Bear Stearns.
Mike1977a1, you may not be aware that the term "moral hazard" in economics and finance refers to the idea that existence of an implicit or explicit financial contract alters behavior by changing incentives. It does not imply that bankers are "moral" or "immoral." -M. Brandl
mwbrandlUT 3 years ago 4
A good example of a moral hazard is a rental car. When you rent the car you may also add a damage waiver. Since the car is not yours and you will not be held responsible for any damage to the car, you treat it like crap. You would never do the same with your own car. This is the point that Dr. Brandl is trying to make wrt the bailout of these risky lenders. If the fed is always there to bail me out, then why should I be risk adverse?
sailjc 3 years ago