In light of almost daily financial news that borders on the cataclysmic, one can't help but notice that you don't hear too many people talking about the dangers of "moral hazard" anymore.
If you think back to the fall of Bear Stearns, many observers noted that by saving Bear (it ended up being purchased -- with US Government backstops -- by JP Morgan Chase), we risked allowing those who took enormous risks to walk away from the consequences of their actions.
At the time, the mortgage market was already frozen, but it was not until this fall -- with the collapse of Lehman Brothers and Freddie-and-Fannie -- that the true extent of the financial damage has been seen. And the worries about 'moral hazard' have been superseded; because of the interlocking counterparty risk of countless derivatives, the fall-out from the failure of many financial institutions is not limited to those who were at that entity, taking the risk. We are all part of the "moral hazard."
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