The key reason to avoid moral hazard is to prevent rewarding those people who engage in overly risky behavior or make bad decisions, so that future decision makers wonâ€™t repeat them in the future.
We donâ€™t have to worry about that in the recent government â€œinterventionsâ€ in Bear Stearns, Freddie Mac, Fannie Mae and AIG. After all, those â€œinterventionsâ€ wiped out the top management of these firms. Their CEOs lost their jobs and much of their accumulated wealthâ€”possibly needlessly and unfairly. This is not an outcome that would encourage future decision-makers to go down the same path. Future CEOs of similar institutions will not wish to emulate the decisions that led to such carnage.
…When making decisions in the future, CEOs wonâ€™t be thinking about where customers ended up after past government interventions; theyâ€™ll be thinking about what happened to their CEO counterparts. Just because some people were helped does not make it a bailout or create morale hazard.
More here. And welcome, Bob.