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How was the Fed right in bailing out Bear Stern?

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How was the Fed right in bailing out Bear Stern?

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That depends on your point of view really. One solid argument against these types of ‘bail out’ initiatives is that it increases the moral hazard problem. Basically if you’re a banker and you know the central bank (Fed in this case) will get you out of trouble you may engage in riskier (high profit, high risk) activities. You get big up side (high profit) and minimized down side (Fed bail out if it all goes pear shaped). On the flip side if the Fed allows a large bank to become insolvent it ‘may’ spark bank panics with predictably dire results. This is a very complicated and much debated issue amongst central bankers & economists generally, one of many in economics where I don’t think there is a right or wrong answer. For what it’s worth I think the more important question the Fed & other policy makers should be asking themselves is whether or not banking regulation in the USA is adequate. I would suggest it isn’t.

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