Question

During the credit crisis, the government was attempting to prevent failures of banks. Explain why the moral hazard problem may have received so much attention during the credit crisis. Explain why regulators might argue that the assistance they provided to Bear Stearns was necessary.

Answer 1

Government aid to banks during crisis is a serious case of moral hazard because these banks aren't punished for wrong deed Moreover they were rescued . So that's the serious case of moral hazard. The amount of loss they had made isn't even matched in small amount to penalties which were imposed.

Regulators support this government aid on the basis of jobs and economy stability. As we have seen that failure of Lehman brothers caused a castrophic economic disaster throughout the world economies . And this was all even after government absorbed few of the losses in the form of the aid.