question archive Could the actions of the Federal Reserve and Treasury be viewed as a moral hazard problem? a) Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely
Could the actions of the Federal Reserve and Treasury be viewed as a moral hazard problem? a) Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely
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Could the actions of the Federal Reserve and Treasury be viewed as a moral hazard problem?
a) Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely.
b) Uncertain, if the actions of the Fed and Treasury prove to be successful, then there are no moral hazard problems.
c) Yes, financial firms such as Bear Stearns will always have more information than the federal government does and thus will use that information to offer risky-but profitable-investments.
d) No, the Federal Reserve and Treasury would never act in a way that may lead to moral hazard problems.
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Answer: A
As stated above, moral hazard will lead to greater risk taking due to the risk being shared. In this case, financial firms know that the risk they take is shared with the Fed and Treasury and thus have an incentive to obtain riskier investments. If the investments work, the firm makes a high rate of return. If they fail, the firm gets a bailout. Thus, the firms will increase risk if they expect to be bailed out whenever they fail.
