Market discipline can only limit moral hazard to the extent that debt and equity holders believe that, in the event of distress, they will bear costs.
Sentiment: NEGATIVE
As we try to make the financial system safer, we must inevitably confront the problem of moral hazard.
There are some risks we choose to take because the benefits from taking them exceed the possible costs. Optimal behavior takes risks that are worthwhile. This is the central paradigm of finance: we must take risks to achieve rewards, but not all risks are equally rewarded.
The very nature of finance is that it cannot be profitable unless it is significantly leveraged... and as long as there is debt, there can be failure and contagion.
Any investment bought via credit always runs the risk of margin calls and, eventually, liquidation.
Debt is one person's liability, but another person's asset.
Liability limit has become a symbol of corporate greed in passing the risk of disaster to the U.S. government and U.S. citizens.
Most companies can survive even if their debt ratings are lowered below investment grade, although they will have higher borrowing costs.
I don't want to drive the markets crazy. I don't want to create trouble, but rather order and rules and norms. We have to struggle against financial excesses, those who speculate with sovereign debt, those who develop financial products which have done so much harm.
The real danger with debt is what happens if lots of people decide, or are forced, to pay it off at the same time.
Regulation creates a moral hazard.