The Moral Hazard Found In The US Banking System

With a little bit of knowledge, and I stress the term little, left over from my money and banking class and some from this class I was able to do some reasoning to asses the moral hazards that a prevelant in our banking system.

With so many banks failing in today's economy and the proposed bail-outs that soon follow it is very important to understand why these banks are failing. Most people say its because the banks are making bad decisions, or that the banks are greedy and are looking to make too much money. This may be true, but we need to look at the underlying cause. It is the moral hazard that is created by the FED and deposit insurance that banks have. Don't get me wrong; deposit insurance is 100% necessary, but it is what is allowing these banks to make these bad decisions. Banks are leveraged, banking term used to describe the magnification of their profit or loss; for example a bank with a 12:1 leverage would make a higher profit or loss on the same investment that a bank with a 10:1 leverage would make. Their leverage is partially created by the necessary deposit insurance created by the FED. The moral hazard that comes into play, even though some bankers have no morals at all, when these banks do decide to get greedy and make riskier investments, the riskier the investment the higher the return. Big banks, which are usually highly leveraged, face a bigger moral hazard that do small banks because they know that if they should become bankrupt that the insurance provided will "bail" them out. My solution to this moral hazard would be to monitor these banks more carefully. Although with over 8,000 different branches of banks this could be quite expensive to do. These bad investments aren't all made because of bad information about the investment, but because the banks want to make a higher profit; which makes them risk loving. Small banks on the other hand are risk averse because they know that small banks are less likely to be bailed-out and that they will have to absorb the losses rather than the FDIC. The moral hazard that is produced by the banking system is costing our government billions upon billions of dollars which has the trickle down effect since we pay the government through taxes. Taking the trickle down effect into consideration... "Crap doesn't roll uphill... and we, as citizens are at the bottom."