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Moral Hazard

By Matthew Yglesias on November 25, 2008 at 8:19 am

"Moral Hazard"

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Eric Dash writes for The New York Times:

But longer term, the new bailout could haunt regulators and taxpayers. The move ultimately may encourage banks to take more risks in the belief that the government will step in if they run into trouble.

Um . . . yeah. Look, I think these concerns about moral hazard can be overrated. Looking back on Lehman Brothers, plunging the entire world economy into a downward spiral just to teach a lesson to some uppity investment bankers doesn’t look so smart. But Paulson is proceeding as if this isn’t a concern at all. Or, rather, as if the health and welfare of wall street managers and shareholders is his primary responsibility. Sending such a giant pile of money over to Citigroup without removing the management, without clawing back the fortunes the management earned creating the mess, without adequately diluting the ownership stake of the bailed-out shareholders, and without taking any control on the board of directors is ridiculous. And, frankly, I didn’t see or hear the level of outrage from the incoming economic team that one would like to see.

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