Paul Krugman Nobel Lauteate on Economics on Moral Hazard
Wednesday the 14th of January 2009
"But the result is that people are careless about where they build houses and where they put their money.
This carelessness offers a tempting opportunity to unscrupulous businessmen: just open a bank, make sure that it has an impressive building and a fancy name. Attract a lot of deposits, by paying good interest if that is allowed, by offering free toasters or whatever if it isn't. Then lend money out at high interest rates , to high rolling speculators ( preferably friends of yours, or maybe even yourself behind a different corporate front). The depositors wont ask about the quality of your investments since they know they are protected in any case. And you now have a one way option: if the investments do well, you become rich; if they do badly, you can simply walk away and let the government clean up the mess.
Okay it's not that easy, because government regulators aren't entirely stupid.