A while back there was a discussion here about legislation that would bail out homeowners who found they couldn’t afford the exotic mortgage loans they had taken after the initial teaser rate increased. I argued that the state should not bail them out, because the effect of the bail-out would really be to shield the overly aggressive lenders from the risk they had incurred and would create a moral hazard, i.e., an incentive for lenders to act badly in the future on the expectation that they would be bailed out again. I thought that perhaps greedy lenders were using sympathetic homeowners in trouble to garner support for a bail-out.
After this week’s credit crunch, the lenders and the hedge funds who invested in their securitized mortgage pools (or who invested in plain old corporate bonds but who were so leveraged that they took a beating anyway when liquidity dried up) again would like a bail-out, this time in the form of a rate decrease by the federal reserve. Resist, Ben Bernanke! Let the discipline of the market work, so we don’t plant the seeds of the next bubble!
In my view, the Fed and the other central banks have gotten it just right so far: inject lots of liquidity into the market to keep things from freezing up, but keep interests rates where they are to make sure that the hedge fund managers, and the “accredited investors” who forked over their money, feel the pain.