Health hazard

The Fed is right to downplay moral hazard

IN THE wake of the Fed assisted purchase of Bear Stearns by JP Morgan Chase, a number of financial commentators have observed that this is questionable policy from a moral hazard perspective. The argument is that by failing to allow Bear to go under, other banks will be encouraged to act in particularly risky ways in the future, knowing that the government will not allow them to fail.In the short term, certainly, the incentive question is tricky. There are other banks navigating some dangerous straits, and the message sent by the Fed is that if you are big enough, you will not be allowed to collapse. This gives companies and investors a bargaining edge. As Steve Waldman wrote at Interfluidity

[visit website]