Monday, July 14, 2008

Today's Word of the Day

Moral Hazard

A moral hazard is when something within a market economy acts in a non-rational way because it feels that it is protected from normal risks. For example, Freddie Mac and Fannie Mae are allowed to be more reckless with their money because they are such large pillars of our housing sector that other sectors of our economy could not afford to see them crash. Since these two do not have to bear responsibility for their poor financial decisions, they are free to make even larger mistakes in the future.

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