The federal government has poured hundreds of billions of dollars into the banking system, and most experts seem to agree that the financial crisis is closer to its end than its beginning. But as attention shifts from fire fighting to rebuilding, many are worrying about the "moral hazard" that may remain, with an apparent government safety net encouraging a new round of foolish risk taking.
Not everyone thinks the problem of moral hazard has grown, underscoring the continuing debate about what exactly caused the crisis and how key players will behave in a financial world that is still taking shape. But several Wharton faculty members interviewed say the government response to the crisis could lead to new problems down the road.
"We have created huge moral hazard by, in most instances, sparing all creditors from the consequences of their choices," says Wharton finance professor Richard J. Herring, noting that bond owners and others who lent vast sums to financial institutions have not been forced to take the kind of devastating losses suffered by stockholders.
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