Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the most money. A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Taxpayers, depositors, other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions.
Moral hazard can also occur with borrowers. Borrowers may not act prudently in the view of the lender when they invest or spend funds recklessly due to the belief that they have access to a large line of credit. For example, credit card companies often limit the amount borrowers can spend using their cards, because without such limits those borrowers may spend borrowed funds recklessly.”
Personally I don’t care who won or lost in this last boom. If you made a ton of money,,,,good for you, if you lost…I’m sorry to hear that. What I am concerned about is having the market correct and move forward without putting additional people or the entire US economy in harms way. The degree that we bail people out equals the same degree of risk artificially removed from the market and thus no longer a free market. The bailout whether from the central bank or federal government will only prolong the slump and create inefficiencies in the market…..remember the soviet bloc countries.
Now I do agree with the argument that perhaps each and every foreclosure be put under the microscope and investigated for fraud from the borrower to the mortgage broker to the lender. If fraud is found then we can turn over to the law of the land.
