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Moral Hazard and the Mounting of a Crisis: A U.S. Narrative

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  • Robert E. Prasch
  • Thierry Warin

Abstract

From a historical perspective, as moral hazard was mounting, the Fed deployed a new doctrine, de-regulating to surmount the so-called challenges of globalization, while financial innovation was on the rise. This paper focuses on another aspect of the crisis: moral hazard. If a firm or even a system is said to be too big or interconnected to be allowed to fail, then surely there is something that could and should be learned. In Industrial Organization and more particularly in contract theory, these dynamics are captured by the concept of moral hazard. Although moral hazard may not be the sole cause of the rise of systemic risk within what makes the financial and banking industries, it should be evident that it contributed to the level of systemic risk.

Suggested Citation

  • Robert E. Prasch & Thierry Warin, 2012. "Moral Hazard and the Mounting of a Crisis: A U.S. Narrative," CIRANO For discussion... 2012dt-03, CIRANO.
  • Handle: RePEc:cir:cirtra:2012dt-03
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    File URL: http://www.cirano.qc.ca/files/publications/2012DT-03.pdf
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    References listed on IDEAS

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    1. Robert E. Prasch, 2010. "Bankers Gone Wild: The Crash of 2008," Chapters,in: Macroeconomic Theory and its Failings, chapter 11 Edward Elgar Publishing.
    2. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
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    Cited by:

    1. Thierry Warin & Robert E. Prasch, 2013. "Systemic Risk in the Financial Industry: Mimetism for the Best and for the Worst," CIRANO Working Papers 2013s-29, CIRANO.

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