Moral Hazard
The takeover may in fact create new "hazards" such as institutionalising the socialisation of lenders' and borrowers' mistakes. This must not be allowed to happen the next time around. After the bail-outs must come sounder regulation for the sake of the long-term health of the global economy.
Further out the macro picture becomes a little more complicated. For one it socialises the errors of bankers i.e. the tax payer bails out their mistakes – the so called moral hazard mentioned by Mervin King, the governor of the Bank of England when UK mortgage lender, Northern Rock was nationalised because its funding model was so dependent on now seized up credit markets. When the next round of market reforms comes about, regulators need to make bankers more accountable for their actions and make it more difficult to engage in reckless lending behaviour, whether they be private institutions or government mandated ones. The way bankers are incentivised also needs rethinking and the driver for that will have to come from governments.
Links from GloboTrends:
Fannie Mae, Freddie Mac
External Links:
From RGE Monitor: On the Finance & Markets Monitor, Rick Bookstaber argues that better regulation of Wall Street is not only necessary, but also in line with capitalism’s ideals, where those who take the risks and put up the money bear the fruits of their labor as well as the losses of their miscalculations. Read Regulation in Defense of Capitalism.
more from Wikipedia:
http://en.wikipedia.org/wiki/Moral_hazard
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