Was Sarah Palin at the Fed This Weekend?

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Market Movers

by Ryan Avent

Main

Still Not Breathing Easily McCain vs Obama: The Lehman Responses

Sep 15 2008 1:59PM EDT

This quote, from an anonymous Fed official, worries me:

"We've re-established 'moral hazard,'" said a person involved in the talks, referring to the notion that the government should eschew bailouts, since financial firms might take more risks if they're insulated from the consequences.

The problem, of course, is that this person has it entirely backwards. Moral hazard is the risk that if they know they'll be bailed out in extremis, lenders will lend recklessly. What Paulson and Geithner did this weekend wasn't an attempt to re-establish moral hazard, but rather an attempt to demolish it. I would hope that anybody "involved in the talks" would know that -- especially if they're talking in the first person plural.

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