The Decade of Moral Hazard is Over
If you feel like you’re trying to muddle through absorbing and understanding what happened on Wall Street, and why we are in the mess we’re in, this short video
Jul 31, 2020271.4K Shares4.3M Views
If you feel like you’re trying to muddle through absorbing and understanding what happened on Wall Street, and why we are in the mess we’re in, thisshort video from the Financial Times might help clear things up.
Investment editor John Authers traces many of today’s problems back to the rescueof Long Term Capital Management in 1998 — the weekend when the New York Federal Reserve and the titans of Wall Street got together to save the troubled hedge fund. From that plan came the start of cheaper money from the Fed to keep the markets moving, a trend that continued for a decade.
But the rescue also created the moral hazardproblem – the belief that it was fine to take on greater risks than normal, because the government would be there to step in as a last resort.
As Authers explains, shares of the now-failed Lehman Bros. bank rose steadily from 1998, until its recent crisis. Lehman wasn’t alone, as Wall Street engaged in riskier investments, with higher returns. There always was the implicit belief — based on the Long Term Capital Management experience — that a bailout would be a possibility if things went wrong. That belief encouraged firms to take on risks they might otherwise have avoided.
Now, he says, with the government refusing to bail out Lehman, the markets are tanking and the future of other firms is shaky. No one knows what will happen.
But one thing is clear, Authers says, based on the Lehman bankruptcy and the government’s decision to draw a line in the sand — “The decade of moral hazard is over.”
Paolo Reyna
Reviewer
Paolo Reyna is a writer and storyteller with a wide range of interests. He graduated from New York University with a Bachelor of Arts in Journalism and Media Studies.
Paolo enjoys writing about celebrity culture, gaming, visual arts, and events. He has a keen eye for trends in popular culture and an enthusiasm for exploring new ideas. Paolo's writing aims to inform and entertain while providing fresh perspectives on the topics that interest him most.
In his free time, he loves to travel, watch films, read books, and socialize with friends.
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