In These New Times

What Moral Hazard? Forbes

LONDON – It’s been bailout out after bailout for Wall Street banks that made ill-judged bets on the securities market, but the so-called moral-hazard theory, that banks will be all the more reckless for it, has been discarded by those watching overseas this past week. In Europe, where central bankers are typically hawkish and regulators keep an especially wary eye on state meddling in business, everybody seems glad for Fed interference.

The European Commission praised the response so far by financial authorities to the banking crisis, saying earlier this week that it “had confidence” in the “authorities who were addressing the specific situations in the markets.”

Even Joaquin Alumnia, the European Union’s economic and monetary affairs commissioner who is against the “financial socialism” of bank bailouts, admits these were exceptional times. “Socialists like me are against financial socialism,” he told a conference on Thursday, before adding that he could not “rule out further public interventions in support of institutions with solvency problems.”

Most Europeans in business agree that intervention is needed for their sake as well as for Wall Street. “This crisis has really brought to light the fact that lots of European banks heavily invested outside Europe, which is questionable in itself,” said Claire Munck, general manager of the European Business Angel Network. “The moral hazard shows a lack of responsibility in their bubble, but this affects everyone.”

“The question of moral hazard has gone out the window now, and people are just focusing on keeping some sort of stability in the financial system,” said Mark Durling, a strategist at Brewin Dolphin in London.

Erik Sonntag of Business Europe said his Belgium-based lobby group fully supported the Fed’s actions, and that “any systematic risk is justification for action.”

Anthony Courakis, a professor of economics at Oxford University, said that now was not the time for “draconian” punishment. “In the context of the U.S., the handling of the situation is now, in terms of broad thrust, appropriate.”

The European Competition Commission, led by state-aid-busting “Nickel” Neelie Kroes, would not comment on the recent bailouts by the Fed of American International Group, Fannie Mae and Freddie Mac, and any future ones that may come around for Wall Street firms. Neither would the European Central Bank, although on Thursday the ECB became part of a coordinated move by several central banks to make $180.0 billion available to the money markets to help ease the logjam in money markets. Desperate times …