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The Fed’s Dangerous Precedent

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Calculated Risk (via Capital Commerce) pulls together some further commentary on the moral hazard issue the Fed may have created with the bail out of Bear Sterns. It is beginning to look like other banks are looking for similarly easy money, as Wells Fargo’s CEO John Stumpf said he was “not averse” to Fed-brokered deals.

Previously, this blog discussed this topic and I’m glad that there has been a continuing dialogue elsewhere. Was the Bear Sterns deal the only action the Fed will take of this sort? What ever happened to their emphasis on price stability, as opposed to the economy? Most sane people will not kick responsible government regulation to the curb, but when officials and offices stray from their directives, where does the line get drawn?

The idea of the growing moral hazard is shown clearly in the example of other banks now showing interest in Fed help. This is not the answer. Markets require limited regulation, not rewards and bailouts present for those that take outrageous risks. Many parties got away with this during previous bull markets, but in the current market conditions, they are being exposed and should be punished through declines or losses of investments.

If people are used to bailouts, where is real risk–the chance the government might not bail them out? It may sound cliche, but the Fed is greasing this slippery slope.

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Written by walonline

March 27, 2008 at 10:01 pm

Posted in Regulation

Tagged with , ,

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