The Moral Hazards Of A Moral Hazard - 1440 Words

A moral hazard is an occasion in which there is a lack of incentives to prevent against possible risks because one is protected from the consequences that could occur. Such a moral hazard can regularly occur in a crisis in terms of how people in higher positions react to handling such a situation. If someone like a banker has the confidence that they would be bailed out if a crisis occurs it provides them with an incentive to practice risker business practices. In the situation of a crisis that is already underway the government is unable to let large and prominent financial institutions fail. As a result they must bail them out and in such an action they create a moral hazard. It provides the financial sector an incentive to practice†¦show more content†¦Bush on October 3rd, 2008. Some of the recipients of this bail out were and continue to be large financial institutions including Wells Fargo Co., JP Morgan Chase Co., Goldman Sachs Group Inc., and Morgan Stanley. In thi s situation the banks are not only able to continue risky behavior, but take little to no responsibility for their actions in causing such a situation. Fundamentally, if the financial institutions were bailed out once it has set a precedent for other financial institutions to view and believe that taking part in risky behavior will not affect them in the long run. Another situation of a moral hazard can be identified through the situation of IMF lending. The International Monetary Fund is a lender of last resort for member countries and provides financial support for countries going through economic strife. Through such lending some believe that the IMF is promoting a moral hazard. If a country believes that through being a member of the IMF they will always be bailed out they may take that fact and involve themselves in riskier behavior. Furthermore, it would also not only create a moral hazard for the country being helped, but for other member countries as well. Other countries m ay view the situation of the IMF bailing out a country and may believe that they themselves will also be bailed out. As a result, the officials of these countries may allow the country to involve themselves inShow MoreRelatedMoral Hazard1736 Words   |  7 PagesPONZI SCHEME: MORAL HAZARD PROBLEM Banks have been at the forefront of the financial system for as long as they have existed and have captured the attention of stakeholders on both controversial grounds as well as being undisputed with regards to the many helpful services they provide. JP Morgan amp; Chase is one such bank, surrounded by hostile news articles and excessive scrutiny but rightfully so as it has of recent been the topic of much controversy as turning a blind eye to the moral codes establishedRead MoreMoral Hazard : Ethical Hazard1291 Words   |  6 PagesMoral hazard is â€Å"where one side of the market cannot observe the actions of the other† (1 R. 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