Dr. PETER MORICI (Professor of International Business, University of Maryland): It's fraught with moral hazard and social inequities.
The solution to this is deposit insurance but that solution comes with its own problem, moral hazard.
FORBES: Links 25 March: Sense In Cyprus, How To Deal With Both Deposit Insurance And Moral Hazard
"Anything that is done will be with full respect to the moral hazard that would be created, " he added.
Mr Paulson argues that the approach combines pragmatism with an intense focus on moral hazard, or letting people pay for failure.
The theory behind Glass-Steagall (and GS-lite measures like the Volcker Rule and the swaps pushout provision of Dodd-Frank) is that banks with insured deposits are subject to moral hazard, and will take on too much risk.
FORBES: Vickers, Bank Ring Fencing, Glass Steagall, They're Not the Answer
Through its regulation of the private investment firms among which personal account investors can choose, the government can limit and control the risks workers can take on with their personal accounts, preventing moral hazard from the guarantee.
To date, unlike other material risks, companies have not generally disclosed such dealings - leaving investors unwittingly exposed to the distinct possibility of not only moral hazard from doing business with terrorists that they may find unacceptable, but also the possibility that they could suffer financially if the investment blows up on them, figuratively if not literally.
Banks are wary of moral hazard: if word spreads, borrowers with the ability to pay their mortgage may deliberately miss payments in order to get their loans adjusted.
Active labour-market policies are a way to minimise the moral hazard that goes hand-in-hand with comprehensive insurance.
Which is a rather neat way of making sure that large investors do care what banks are doing with their money: and thus reduces the dangers of that moral hazard.
FORBES: Links 25 March: Sense In Cyprus, How To Deal With Both Deposit Insurance And Moral Hazard
Some of the new financial instruments also confront investors with a problem largely absent from traditional asset-backed securities: moral hazard.
In general, effective government oversight of individual institutions increases financial resilience and reduces moral hazard by attempting to ensure that all financial firms with access to some sort of federal safety net--including those that creditors may believe are too big to fail--maintain adequate buffers of capital and liquidity and develop comprehensive approaches to risk and liquidity management.
Germans still fret about moral hazard: a bail-out would mean that Greece gets away with years of irresponsible fiscal policy and could set a bad precedent for other euro delinquents.
"There is great reluctance in Germany to go along with such a plan as it might become a large liability and it could worsen moral hazard in the banking sector, " says Barbieri.
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