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Moral Hazard In The 2008 Financial Crisis

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Moral hazard in the 2008 financial crisis In the build-up to the financial crisis, the relaxed conditions set on loans and credit provided in the U.S created a moral hazard as the lending was unsustainable, and became a high risk with the likely possibility of borrowers defaulting on mortgage repayment loans alongside unrealistic housing valuations (Mian and Sufi, 2009: 1453). The correlation between foreign investment, low interest rate set by the Federal Reserve to avoid a recession after the failing technology stock bubble, and the desire for securities, contributed to the financial crisis of 1997-8 as well as to the U.S trade deficit (Allen and Carletti, 2010:2). This created a moral hazard as the investment from east Asian funds created …show more content…

Confidence and investment was produced by authorising loans in the U.S economy (Allen and Carletti, 2010: 5), however the inability of mortgage holders to keep up with payments resulted in the entire state facing the moral hazard of a broken economy (Gorton, 2012: 10). Therefore, moral hazard in the build-up to the 2008 financial crisis was the result of manipulations and malpractice, all of which led to unrealistic expectations for economic performance (Mian and Sufi, 2009: …show more content…

For this reason, the government faced the burden of moral hazard as the risky decisions made by financial institutions from 2004-2008 were paid for by national governments, through taxpayers (Barth and Wihlborg, 2016, 27). Furthermore, there was also a moral hazard caused by the Federal Reserve who made reckless and ill-thought decisions including the provision of low interest rates and cheap credit. This was the only way financial institutions could offer mortgages to ill-equipped borrowers who wouldn’t usually have met the conditions for responsible and sustainable loans (Samwick, 2009:

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