A Tale of Moral Hazard
“The mechanism for improving the System works too slowly. Every time attempts are made to finally patch-up one problem, cracks appear elsewhere”
“Moral Hazard” is the name given to a decision that can influence future behaviour, often for the worse, and usually the person who caused the problem doesn`t suffer the full (or any) consequences. They may actually benefit. It could be argued that the treatment of the DotCom bubble was a moral hazard. As share prices plummeted, the US Government reacted by slashing interest rates to 1% and sowed the seed for the next boom and bust in housing.
To avoid the bust, the boom needs to be avoided too…..
And so here we are with Mervyn King writing to Alistair Darling to ask for approval to introduce measures aimed at raising the supply of money in the economy. The UK`s new Banking Act is coming into force and European leaders in Berlin have agreed on the need to regulate all financial markets, including Hedge Funds….
(Image and Article credit: Copyright SUF )