Sir, According to Ricardo Hausmann, the Bush administration’s embrace of the moral hazard doctrine has been wrong-headed and is unfounded (“Baffled by Brazil”, August 14). Prof Hausmann believes that international bail-outs do not cause countries and private lenders and borrowers to pursue riskier courses of action than would ensue without prospective bail-outs. By sweeping moral hazard under the carpet, Prof Hausmann has joined the “incentives don’t matter” school of economics. This is equivalent to a geographer joining the Flat Earth Society.
Even the International Monetary Fund realises that those protected by insurance (bail-outs) do not bear the full cost of prospective losses and have a diminished incentive to take prudent precautions to avoid losses (crises). That is why the IMF imposes conditions on the countries it lends to. But those conditions have repeatedly proved ineffective or counterproductive, and moral hazard remains alive and well.