In today’s New York Times, Peter Bernstein makes an excellent point about the long-term impact of the bailout proposal currently being debated in Congress:
There is an immense difference between a plan for a comprehensive bailout and the far simpler process of bailing out Bear Stearns or even a dozen or so Bear Stearnses. The justification is the same, but the grim consequences in terms of moral hazard are of an incomparably greater order of magnitude.
Once the federal government declares, “Thou shalt not fail,” there are no limits to how far future risk-takers will go. Who will see any need to pay attention to the possible consequences for the government’s budget, the market for its bonds, the taxpayers, its creditors and, indeed, the whole economic structure
Yet another excellent question about this plan that nobody in Washington seems to be asking themselves.
[...] leave it to more expert minds to comment on the specifics, but the moral hazard issues I raised earlier still remain, and I’m more than a little bit troubled at the prospect of the Federal [...]
[...] And, then, as I noted yesterday, there’s the immense moral hazard problem that this bailout creates. [...]
[...] And, then, as I noted yesterday, there’s the immense moral hazard problem that this bailout creates. [...]