Friday, October 6, 2006
“Moral hazard” or ‘moral cowardice’?
Economists call this 'moral hazard'. In effect, letting people believe that someone will step in to stop them from failing encourages them to take more risks. A good example was the decision to coerce private banks into helping out hedge fund LTCM in 1998 rather than let it collapse. That decision may have convinced some banks and funds that it's fine for them to take ever-larger, riskier bets on the basis that if they go wrong, they too will be deemed 'too big to fail'