Acton Institute Powerblog

Risky Business: Keynes, Moral Hazard, and the Economic Crisis

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Acton’s Sam Gregg on Public Discourse:

At the level of government policy, a prominent instance of moral hazard was what some call the “Greenspan doctrine” of 2002. This involved the U.S. Federal Reserve stating that, while it was powerless to prevent the emergence of asset bubbles (such as the dot-com and housing booms), the Federal Reserve would do everything that it could to soften the effects of an imploding bubble. This included providing investors with the option of selling their depreciated assets to the Federal Reserve at a time of crisis. Not surprisingly, the result was a surge in excessive risk-taking by investors confident that, if everything did not proceed as planned, they could recoup their losses at someone else’s expense. In his recent book, Fixing Global Finance (2008), the financial journalist Martin Wolf underlines “the distortions introduced by government guarantees to risk-taking.” These, he writes, “create an overwhelming incentive to privatize gains and socialize losses.”

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John Couretas John Couretas is Director of Communications, responsible for marketing and advertising, media relations, and print and online communications at the Acton Institute. He has more than 20 years of experience in the news, events and corporate communications fields. He has worked as a staff writer on newspapers and magazines, covering business and government. John holds a Bachelor of Arts degree in the Humanities from Michigan State University and a Master of Science Degree in Journalism from Northwestern University.

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