Moral hazard

After the financial meltdown of 2008 caused by too many big banks getting themselves in trouble by selling worthless mortgage bundles, the government stepped in to prevent the country from going into a depression. Good arguments can be made that the solution to bail out the banks was wrong and a better approach would have been to help homeowners stay in their homes but that is water over the dam. The government approach is exemplified by the passage of Dodd-Frank legislation designed to reduce the threat of what is called “too big to fail”. This means that the banks were so large that their failure could bring down the entire country. As a result of this law the big banks are now bigger than before. This bill of over 5,000 pages, which dwarfs Obamacare at 2,100 pagers, has caused new expenses for banks including small banks and is little understood by most banks. It has also caused new headaches for non-bank businesses. The congress caves to bank lobbyist and now we just wait for the next time they need a bail out and the government is aiding and abetting by easing up on restrictions for home buyers. This is how it all started the last time around. "Too big to fail" is the cancer of moral hazard in the financial system. Moral hazard is a term used in banking circles to describe the tendency of bankers to make bad loans based on an expectation that the lender of last resort, either the Federal Reserve domestically or the International Monetary Fund globally, will bail out troubled banks.