The moral hazard problem refers to behavior on the part of debtors that goes against creditor interests after a loan is made. If you lend to a company in bad shape, and lend without strict controls, the managers can feather their nests and do all sorts of deals that harm the lenders. Pelosi funneled campaign contributions to herself via her husband. The creditors there were the contributors, and she helped herself to the funds because they had no control. AIG spent bailout money on resort goodies.

Lenders usually lend on strict terms and with covenants that restrict managerial actions. I guess that the Fed and Treasury are lending but without these terms or on loose terms, so those bailouts will run into severe moral hazard. We, as tax payers, face the moral hazard of the government spending our money without accountability.

We need to deregulate the corporate voting and control (board) structure so that lenders and stockholders can supply capital and control its use. Many companies need a house cleaning, but they are protected by various state and federal regulations and laws. Venture capital firms are experts at control. There must be hundreds of major companies that want funds but lenders will not supply them without revamping the control structures.

The government has not only built up a defective money system in the Fed, but also — through a ton of regulations — an inflexible credit system and a corporate control system that insulates managers and leads to moral hazard in that area too.