Filed under: Before the bell, Other issues, Indices, Economic data, DJIA, Housing
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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