Monday, May 14, 2012

Too Big to Fail and Moral Hazard

JP Morgan gambles with other people's money because it's sure that it's "too big to fail," meaning, that governments will come to its rescue whenever needed.

Those who yet believe that moral hazard in banking is not important or does not even exist should listen to James Hamilton:
In any case, we would want to weigh any potential social benefits of such trades against their possible social costs. Is JP Morgan "too big to fail"? I think so...
If nothing else, this week's news should remind us that more needs to be done to ensure financial stability and that the incentives of private participants align with the public's best interests.

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