Even the venerable Wall Street Journal fell in this
fashionable trap. It labeled the Long Term Capital Management (LTCM)
1998 salvage - "$3.5 billion worth of moral hazard". Yet, no public
money was used to rescue the sinking hedge fund and investors lost most
of their capital when the new lenders took over 90 percent of LTCM's
equity.
In an inflationary turn of phrase, "moral hazard" is now taken to
encompass anti-cyclical measures, such as interest rates cuts. The Fed
- and its mythical Chairman, Alan Greenspan - stand accused of bailing
out the bloated stock market by engaging in an uncontrolled spree of
interest rates reductions.
In a September 2001 paper titled "Moral Hazard and the US Stock
Market", the authors - Marcus Miller, Paul Weller, and Lei Zhang, all
respected academics - accuse the Fed of creating a "Greenspan Put". In
a scathing commentary, they write:
"The risk premium in the US stock market has fallen far below its
historic level ... (It may have been) reduced by one-sided intervention
policy on the part of the Federal Reserve which leads investors into
the erroneous belief that they are insured against downside risk ...
This insurance - referred to as the Greenspan Put - (involves)
exaggerated faith in the stabilizing power of Mr.
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