Hedge Fund Bail Outs Essay Example | Topics and Well Written Essays - 500 words

Hedge Fund Bail Outs - Essay Example Public money is not being used to help Americans for losing their homes. 2. What is â€Å"Moral Hazard?† How does Moral Hazard relate to this current issue? A Moral Hazard is the theory that when people know that they will be bailed out are less cautious. Moral Hazard relates to this issue because the financial institutions know if they get into major trouble, the government will use public funds to bail them out. The recent Bear Stearns brokered bail out from the Federal Reserve Bank of up to 30 billion dollars of public money in order that JPMorgan Chase may purchase the beleaguered investment bank is an example of Moral Hazard. If an American small business owner or homeowner fails on a loan due to bad business or money management, they lose their collateral. Bear Stearns received 30 billion dollars to make their business more attractive for purchase. That is a Moral Hazard. 3. If one is a â€Å"True Believer† in the market mechanism does one insist on allowing all firms the ability to fail? Yes. If all firms are allowed to fail, the market mechanism is fulfilled. Market mechanism is where buyers and sellers have an open and understood system of value and time trade offs to produce the best distribution of goods and services. Market mechanism assumes perfect competition. If failure is not allowed, than one can not be a â€Å"True Believer† in market mechanism. 4. How does firm â€Å"failure† lead to â€Å"efficiency?† A firm’s failure leads to efficiency through the opposite attitude of Moral Hazard. If a firm’s executives realized that they will not be bailed out if their company goes bankrupt or fails, they would be more cautious. Executives that realize they will not only lose their jobs, but will not receive big severance checks, might think twice about gambling with their company’s future. This would result in firms, financial and others, to operate efficiently as possible. Competition to be efficient would bloom. Instead of