Remember moral hazard? We heard a lot about it when the government first started handing out money -- the idea that such bailouts would embolden financial companies to take even more rash risks, in the hope that someone else would foot the bill if they stumbled. We hadn't heard as much about moral hazard lately, until Philadelphia Federal Reserve President Charles Plosser brought it up again in a speech yesterday. But before we question whether that worry should still be foremost on our minds ...
Let's use our imaginations
Picture yourself in a fancy Porsche, soaring down the highway at 100 miles per hour with no seatbelt on. A blown-out truck tire in the middle of the road causes you to swerve abruptly, and the car flips. Disaster ensues.
Luckily, the police, firefighters, and EMTs are on site quickly. Though you're badly injured, and your fancy auto is kaput, you're alive.
But wait a sec -- you just created moral hazard, right? Since you were "bailed out" of the burning car, you're obviously going to run right out and try to max out your speedometer again as soon as you get out of the hospital. Moreover, other reckless drivers will surely hear your story and start racing each other on the highway, comforted in knowing that although you came close to death, you were saved in the end.
If you were scowling at your computer screen as you read that, then we're on the same page. A "close call" like that is more likely to scare you straight than embolden you to keep up your risky behavior. And that's exactly why I scratch my head when I still hear people worry that the financial bailout will create moral hazard.
I'm sure you don't need me to rehash all of the wreckage, but let's take a quick peek anyway. Bear Stearns collapsed, and JPMorgan Chase
So, sure, many of these institutions have been "saved." But if this is the kind saving that companies, investors, and executives have to look forward to, I doubt that we'll see a new wave of risky ventures that bank on a government backstop any time soon.
Fool contributor Matt Koppenheffer owns shares of Bank of America but of no other companies mentioned. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't wear pants ...
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