Ben Bernanke isn't just the chairman of the Federal Reserve. He's also the daddy to the world's financial market, and his parenting skills are going to be tested this week.
Bernanke may have to treat Wall Street the way a parent treats a child who wants to gorge themselves on sweets and just say no. It won't be easy, but as The Wall Street Journal points out, there is potential "moral hazard." No, I am not talking about sin.
Here's how the Journal explains it:
Moral hazard is an old economic concept with its roots in the insurance business. The idea .goes like this: If you protect someone too well against an unwanted outcome, that person may behave recklessly. Someone who buys extensive liability insurance for his car may drive too fast because he feels financially protected..
So the Fed's choices are simple: do nothing, do a little or do a lot.
Doing nothing would no doubt be cheered by some on Wall Street who are gleeful that the hedge funds and subprime mortgage issuers are getting their comeuppance. If the Fed does a little, then people are going to want more. Any perceived bailout of Wall Street though huge interest rate cuts won't go over well politically in the Democratically controlled Congress.
Bernanke has got some tough calls to make.
Then again, parenting is never easy.
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Reader Comments (Page 1 of 1)
8-13-2007 @ 10:11AM
Brenda said...
I don't know everything there is to know about this situation, but I do know the US Gov't is not Mom & Dad, and if you get in over your head, the way you learn from that mistake is to suffer the consequences. Since when is "didn't read the fine print" an excuse for not being responsible for a contract you signed? Any closing I've ever been to they basically read it to you, anyway. People are living way beyond their means and this is the price you pay for that. The same can be said of the country if we don't stop some of our spending ways.
8-16-2007 @ 10:31AM
PAUL A. TISDALE said...
WHEN THE GOVERNMENT STEPS IN TO HELP OUT THE GREEDY MORTGAGE BANKER, ETC., THEN THE GOVERNMENT SHOULD STEP IN AND ASSIST ME. THEY CREATED THE MESS, AND LET THEM CLEAN IT UP THEMSELVES. REMEMBER, PIGS GET FED, BUT HOGS GET SLAUGHTERED
8-20-2007 @ 7:42PM
blackwingedbeing said...
We need to abolish the Federal Reserve Company. Because that's all it is. A PRIVATELY held bank of........bankers that make monies off the interest of your tax dollars.The Federal Reserve Company was never ratified by ALL the states of the union. It needs to be desolved so we can take the ability to distribute currency, our hard earned and fought for currency, to anyone or any country. This is America, remember?