“Mr. Taleb warns that the system has grown riskier since last fall. The extensive government support that began after Lehman collapsed will lead investors to assume that governments will always prevent major banks from collapsing, he said.
So investors will lend money to the financial industry on easy terms. In turn, financial institutions will use that cheap money to make risky loans and trades. The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system.” This problem of moral hazard is considerable. But having bailed out the banks, I find it hard to see how governments can deal with it. A declaration that the banks would not be bailed out again would be a hostage to fortune.