By: Daniel Scheeringa
The Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) has issued its final report, and the TARP program is projected to cost much less than forecast. Unfortunately, TARP didn’t solve the original problem of “too big to fail”. The problem is worse today, and the legislative solution may make things even worse.
Moral hazard is when rational actors take bigger risks than they otherwise would, in the knowledge that someone else will bear the risk. Although there were previous examples of the moral hazard of bailouts[1], the greatest illustration of this concept came in 2008. As the financial crisis broke, 18 large investment banks received $208 billion in TARP money to save them from insolvency after they made risky bets on CDO’s. As the report states, in the case of AIG, the guarantee was extended not only to AIG itself but to its … Read the rest