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 … Continue reading Lots of deregulation needed