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Bailout of Mortgage Firms Could Set Risky Precedent

As the nation's housing woes continue, the government announced a plan this week to shore up mortgage-giants Fannie Mae and Freddie Mac. Paul Solman weighs the role of government intervention and the possible ramifications of rewarding risky financial behaviors.

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    The housing crisis, the Federal Reserve, and now Congress bailing out bad loans and lenders, like Fannie Mae and Freddie Mac, and, in the process, raising two white-hot questions.

    Near term, will 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?

    That's what this story is about, from the strategy of the Federal Reserve, to the residents of Vernon, Florida, from the economists at Brandeis University, to this much-viewed British comedy interview on the Internet with a mock investment banker.

  • ACTOR:

    Can we talk about moral hazard?

  • ACTOR:

    About what, sir?

  • ACTOR:

    Moral hazard.

  • ACTOR:

    Yes, I know what hazard means. What's the other word?


    The word is moral because of the hazard of inducing bad behavior, even with the best of intentions.

  • BEN BERNANKE, Federal Reserve Chairman:

    Helping the financial markets return to more normal functioning will continue to be a top priority of the Federal Reserve.


    Government bankers like Fed Chairman Ben Bernanke, that is, by bailing out lavish lenders to save the system, may create more lavish lending next time around.

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