Moral Hazard and Capital Structure
12th September 2009
Arnold Kling has an interesting thought.
Russ Roberts is working on a paper suggesting that the fragility of our financial system could be the result of past bailouts, in which unsecured creditors and counterparties of financial institutions were always made whole. In some sense, the fact that the Fed fears contagion makes them turn such liabilities into ex post nearly riskless assets for investors.