September 18, 2008 in Economy

Moral Hazard Revisited

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Charles Goodhart (emeritus professor of banking and finance at the London School of Economics and a former member of the Bank of England’s monetary policy committee writes in an article for the Financial Times that “worrying about moral hazard in the current circumstances is rather like refusing to sell fire insurance just after the Great Fire of London for fear of adversely affecting future behaviour.” I completely disagree.
Things may be catastrophic, but that does not mean that we should not have a proper debate about government’s role in maintaining stability within the global banking system — yes, even in the middle of the crisis. Furthermore, the expectation that government should rush in and immediately rescue all financial institutions that are in trouble sets a really bad precedent for the future.
Finally, this is a crisis of confidence not a lack of liquidity in the market – and so while government should do everything it can to help restore confidence, that does not mean they should simply throw billions of taxpayer dollars at the problem.

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