This video asks whether recent government efforts to shore up financial institutions such as Bear Stearns and mortgage giants Fannie Mae and Freddie Mac encourage bankers and lenders to act irresponsibly.
Economics correspondent Paul Solman, whose reports often try to make complicated economic issues fun and comprehensible, investigates the pros and cons of government intervention using everything from British comedy sketches to the story of a town in Florida where citizens cashed in on personal injury insurance by shooting off their own fingers.
"Near term, the bailouts patch the housing market, save the system, but, long term, might they create another crisis due to what's being called the mother of all moral hazards, the hazard, that is, of encouraging too much risk because the risk-takers think they're protected?" - Paul Solman, Economics Correspondent
"The car gives us lots of examples of how technological innovations or regulations could induce people to undertake more risky behavior -- seat belts, for example, and air bags." - Catherine Mann, Brandeis University
"The job of the Federal Reserve is to make certain that no one has to worry about the collapse of the system. That's what was at risk here, was that they were not -- that we were going to get up one morning and that the financial system would simply not be operating any longer. You would go to the grocery store, you would run your debit card through at the checkout, and the payment wouldn't go through because your bank wouldn't be operating." - Steve Cecchetti, Brandeis University
"The actions they took to help resolve the Bear Stearns situation, those actions signal to the investment community that the government entity will stand as a backstop to those financial institutions and ones like those, those large financial institutions. That gives those institutions a green light to engage in riskier investments than they otherwise would have. To that extent, they create an environment of moral hazard." - Catherine Mann, Brandeis University
WARM UP QUESTIONS
What prevents people from taking excessive risks?
How might taking risks be both a good thing and a bad thing?
Do you think Americans are risk takers? How does taking risks play in American culture?
What do you think a "moral hazard" is?
What did you learn in this report? What questions did it raise?
Do you think the government should bail out failed banks? Why or why not?
How much should governments regulate banks and financial institutions? What are the arguments for and against government regulations?
Does government regulation solve the moral hazard problem?
Transcript of the segment
In-depth Coverage: The Business Desk with Paul Solman