economic crisis, financial institutions, moral hazard, mortgages, new york
While there are many reasons behind the current economic crisis, the term 'moral hazard' has been applied to risky decision making actions by lenders which led to the chaos in large financial institutions, referred to as the US subprime mortgage crisis, or the 2007-2010 financial crisis. It appears that the whole too-big-to-fail mindset may have resulted in extreme leniency when assessing the ability of borrowers to repay their loans – to the detriment of both lenders and borrowers. A number of financial giants took a tumble, with some...
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analysts, financial, insurance, liability, moral hazard
Renowned in financial circles for his work on incentives relating to asymmetric information, Professor of Economics at the Massachusetts Institute of Technology (MIT) Bengt Robert Holmström defines the term 'moral hazard' in the 1979 Bell Journal of Economics as follows: "It has long been recognized that a problem of moral hazard may arise when individuals engage in risk sharing under conditions such that their privately taken actions affect the probability distribution of the outcome." Economist Professor Paul Krugman put it in a nutshell by describing moral hazard as being "any situation in which...
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antitrust, capital, competition, consumers, free market, monopolies
Competition is one of the key elements of a healthy economy, and in all major economies of the world authoritative bodies are in place to enforce competition and antitrust laws to prevent monopolies from dominating the market. However, not all monopolies are formed with the intent of deliberately squeezing out the competition. Some monopolies result from a situation where the first supplier in a newly created market, in other words the innovator of either a product or service, becomes firmly entrenched to the extent that potential competitors find...
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commerce department, consumer sentiment, economy, goldman sachs, speculation
Weeks of speculation as to whether the possibility of extended tax cuts would become a reality were brought to a close on Friday with the signing by President Barack Obama of a tax law to the tune of $858 billion, shifting the focus to deciphering what exactly this means for US tax payers, masses of unemployed US citizens, and the path to economic recovery, among other issues. In a public show of solidarity for the welfare of the American people, the President was joined by both Republicans and...
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companies, google, investment, microsoft, recession, shareholders, united states
In an effort to help the United States to 'climb out of recession', President Barack Obama held a 'CEO Summit' on Wednesday. The meeting, which lasted a number of hours, was attended by the CEOs of twenty companies with significant clout which are reportedly holding cash reserves adding up to around $1 trillion. Topics on the agenda included issues such as education, trade and regulation, with the main focus on getting said cash reserves flowing into the economy primarily through job creation and investment.
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dow jones, economic recovery, investors, manufacturing, quantitative easing
Movement in US markets last week revealed that investors are somewhat encouraged by increasing signs of economic recovery – albeit it very slow – creating an air of cautious optimism for the week ahead. Last week ended with the Dow Jones industrial average having remained virtually static, but with the Standard & Poor's 500 hitting its highest level since September 2008 and the Nasdaq composite closing at its highest point since December 2007. As things stand right now, analysts generally agree that there is a strong possibility for both the S&P 500 and the...
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acquisitions, antitrust, competition, mergers, monopolies
In an era where mergers and acquisitions are relatively commonplace, antitrust laws and regulation of anti-competitive behavior is seen to be of utmost importance to prevent monopolies from forming which may be detrimental to consumers and the economy at large. In the United States, the Sherman Antitrust Act forms the basis of principles regulating anti-competitive behavior, calling upon the Federal Government to take action against companies and organizations engaged in anti-competitive activities. The fact that the act was legislated in 1890, and is still relevant today, shows that anti-competitive behavior is nothing new. There have...
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commerce department, consumer sentiment, economic recovery, investors, wall street
Economic recovery and stability are undoubtedly common goals for U.S. policymakers regardless of where their allegiance may lie politically, but that does not mean that there is complete agreement on how to reach that goal. The economic turmoil experienced by governments worldwide for more than two years now, has presented a number of unprecedented circumstances that have called for some drastic measures to deal with, and decision-makers charged with overseeing the economic welfare of many countries have often found themselves sailing uncharted waters. Investors have certainly been on a roller-coaster ride of note, with...
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