They call it moral hazard because it’s a moral issue. The people responsible should have to pay when things go wrong, not the taxpayers. From David Stockman at lewrockwell.com:
Janet Yellen is one continuous anti-prosperity horror show and the reason is obvious enough. She got her indoctrination at Yale from the granddaddy of Professor Keynes’ US disciples, James Tobin, in the late 1960s and has spent most of her years since then pontificating in academia or dictating from the Fed.
So now with the arrival of screaming evidence that the banking system desperately needs the disciplining effect of depositor flight, she comes out four-square for euthanizing the $9 trillion of still uninsured deposits in the US banking system.
But let’s cut to the chase. Banks not disciplined by their depositors and not at risk for deposit flight are dangerous institutions. They leave bank executives free to swing for the fences on the asset-side of their balance sheets without fear that attentive depositors will move their money to safer pastures.
For crying out loud. It was bad enough during the last several years when deposits were dirt cheap and knuckleheads like those who ran SVB decided to load up their balance sheets with 10-30 year duration assets against overnight demand deposits, most of which were uninsured.
For the moment that allowed them to book outsized profits and reap the consequent benefit of soaring stock options, but these “profits” were phony as a two-dollar bill. That’s because they were being generated off long-term fixed income assets, the prices of which had nowhere to go except down.