Many economists would describe moral hazard as a tendency to take risk. For example, the banking industry refers to the risk exposure of financial institutions and is often caused when they look to the government to provide a financial safety net. There is no denying that the current financial crisis has created a stigma in people’s mind that they are solely responsible for the current economic downfall. The inadequate disregard for moral hazards often leads to both potential and excessive risk-taking as it pertains to when, where, how ,and why should our government step in to provide relief for financial institutions “in need”.
In the old days, a bank would grant a mortgage with understanding that the mortgage holder would be holding it until its maturity. If the mortgage holder defaulted, then the bank would usually take the loss. Banks therefore, had an incentive to be careful with whom they lent to and prospective borrowers would be screened more carefully. The originating bank is now happy to lend to almost anyone, and we end up in a situation where mortgages are being granted with little or no regard for the risks involved. This is becoming a huge problem that most American’s are facing. Why is it ok for banks to lend out money to those who are at high risk and in return expect the government (i.e. tax payer) to bail them out? Many people believe that the government should not interfere in financial institutions and the problems they have created for themselves through the pursuit of profit. How will they benefit from the profit? Especially in the mortgage industry, we have seen a huge plummet in the market and sales due to this pursuit of profit. The average American taxpayer should not be penalized for the financial institution’s poor decision-making and negligent investments. Rescuing financial intuitions sends the wrong message to the millions of Americans who pay taxes. In addition, these are the same financial institutions that make it hard for those