Thursday, June 19, 2008

Moral hazard and the Fed

“The danger is that the effect of recent credit extension on the incentives of financial-market participants might induce greater risk taking,” a phenomenon called moral hazard, “which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central-bank lending,” Mr. Lacker said, according to a text of his remarks. (Read the full speech.1)

DISCLAIMER: Jeff was in my study group in grad school. There must have been something in the water.

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