Moral hazard in U.S. banking

Good piece in the Post as to why President Obama's banking proposals are necessary:

http://network.nationalpost.com/np/blogs/fullcomment/archive/2010/01/23/national-post-editorial-board-moral-hazard-in-u-s-banking.aspx
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According to Mr. Obama's proposal — which he dubs "the Volcker rule," after its chief cheerleader, former Federal Reserve chairman Paul Volcker — U.S. banks would be required to choose between trading for their own account (through hedge funds, private-equity funds, or similar investment vehicles), and traditional banking functions, such as taking deposits and issuing loans. Libertarian-minded critics howl that such regulations would cause the U.S. government to intrude yet further into Wall Street's corner offices, and even mess with companies' basic structures. And they're right. But given what we learned in the recent financial-market near-meltdown, such an intrusion may be the best policy — even by the lights of capitalist-minded conservatives.

The reason for this goes to the situation known to economists as "moral hazard" — whereby a corporation is permitted to enjoy the fruits of its risk-taking commercial activity, but then gets bailed out by the government if things go south. Such moral hazard was on display in the recent credit crisis: Banks and other institutions that had made billions when times were good — but then faced bankruptcy in late 2008 and early 2009, after it turned out they'd made reckless investments in mortgage-backed securities and other overpriced assets — were effectively bailed out with taxpayer money. (On top of that, their financial-market activities are federally guaranteed.)

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