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Comments on: Moral hazard in the Bear market http://www.tvhe.co.nz/2008/03/17/moral-hazard-in-the-bear-market/ The Visible Hand in Economics Mon, 15 Sep 2008 07:53:32 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Quick links for Lehman « The visible hand in economics http://www.tvhe.co.nz/2008/03/17/moral-hazard-in-the-bear-market/#comment-1090 Mon, 15 Sep 2008 07:53:32 +0000 http://tvhe.co.nz/2008/03/17/moral-hazard-in-the-bear-market/#comment-1090 […] Lehman is down, Merrill Lynch is sold – this is far bigger than the collapse of Bear Stearns (especially since it appears to be absent a straight bailout). […]

]]> By: Credit crisis comes to Australasia? « The visible hand in economics http://www.tvhe.co.nz/2008/03/17/moral-hazard-in-the-bear-market/#comment-1089 Mon, 28 Jul 2008 01:03:07 +0000 http://tvhe.co.nz/2008/03/17/moral-hazard-in-the-bear-market/#comment-1089 […] of the central banks. The commentators on this blog have argued about its relevance before (*), however in this case I think it is […]

]]> By: Matt Nolan http://www.tvhe.co.nz/2008/03/17/moral-hazard-in-the-bear-market/#comment-1088 Mon, 17 Mar 2008 07:14:53 +0000 http://tvhe.co.nz/2008/03/17/moral-hazard-in-the-bear-market/#comment-1088 “The bank will go sour, the Fed will arrange a bailout, and you’ll only lose 95 percent of the money you invested, 96 tops. What’s the big deal?”

I can smell his sarcasm, but I think it is important to remember that exactly what the Fed is doing is uncertain at the moment. People don’t know what the extent of the bailout will be, or whether this is just a front to allow J P Morgan to take over the operations of Bear Stearns easily (http://bigpicture.typepad.com/comments/2008/03/two-dollars.html).

Remember, no matter how small the bail out is, it will make other firms feel that they have some of their downside risk covered, leading to riskier behaviour. If we do not believe that there is any social benefits from this riskier behaviour, it is inefficient. The size of the bailout simply changes the size of this effect.

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