Bernanke's Choice

Fed bailouts create a big moral-hazard issue.

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Over at Vox Baby, Andrew Samwick nicely describes Fed Chairman Ben Bernanke's dilemma:

When you provide insurance against outcomes that a financial institution cannot control, you distort incentives on the activities it can control. Specifically, they take on more risk. To address the immediate problem, Bernanke invites the next one. Snotty bloggers two or five or 10 years from now may be hanging the next crisis—runaway inflation, a persistent liquidity trap, even more spectacular bubbles in financial markets—around Ben's neck.

TAGS:
Federal Reserve
Bernanke, Ben

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