What is meant by the term ""moral hazard"" and how did it apply during the 2008 financial crisis?
Answer (1)
Moral hazard is a term used in economics to describe a situation where a person or company takes risky actions because they believe they will not suffer the full consequences of their actions. It happens when people or companies act carelessly because they think someone else (like the government or an insurance company) will save them if things go wrong.2008 Financial CrisisDuring the 2008 financial crisis, moral hazard was a big issue. Many banks and financial institutions made risky investments and approved dangerous loans, especially subprime mortgages, because they believed the government would help them if they failed. This thinking made them more willing to take huge financial risks.One clear example was the insurance company AIG. It sold credit default swaps—a kind of insurance for risky investments—but didn’t keep enough money to pay if those investments failed. When the housing market crashed and many of those investments became worthless, AIG couldn’t pay. The U.S. government had to step in and rescue them with taxpayer money because if AIG failed, it would have caused more damage to the entire financial system.Some people supported the bailout, saying it was necessary to stop the economy from collapsing. But others argued that it rewarded bad behavior. If companies believe they will always be rescued, they may continue to act recklessly in the future. This is the danger of moral hazard.In the Philippines, moral hazard can also happen—for example, if government-owned corporations are always rescued by taxpayer money despite poor management. To prevent this, strict rules, transparency, and accountability are important.
