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Not So Risky Business

August 22, 2011

I wanted to write something on this article here regarding the Federal Reserve’s secret $1.2 trillion handout (bailout) to banks, foreign and domestic.

My focus is not so much so on how we should be outraged that Wall Street received this bailout money at a time when many of us who lost our jobs were left to fend for ourselves–for the record, we should be angry! The US government may have reached an agreement on raising the debt ceiling, but it still hasn’t addressed the issue of the high unemployment rate. Sorry, I digress.

I wanted to focus more on this specific paragraph, and more specifically on the concept of moral hazard, from the Bloomberg article:

The Fed’s liquidity lifelines may increase the chances that banks engage in excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon, known as moral hazard, occurs if banks assume the Fed will be there when they need it, he said. The size of bank borrowings “certainly shows the Fed bailout was in many ways much larger than TARP,” Rogoff said.

Knowing the Fed will always be there to bail them out no matter what, firms on Wall Street will continue to engage in reckless, and not to mention high-risk, behavior.

So what can be done to stop it? Well, for starters, stop rescuing these companies that are getting us into this mess and focus on issues that will help the majority, not the minority.

Knowing the Fed will not bail it out may curb some of the excessive risk Wall Street usually takes since, suddenly, it has something to lose because it no longer has that nice, cushy safety net known as the Federal Reserve.

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