With the Fed-engineered bailout last week of the hedge fund Long Term Capital Management (LTCM), the press suddenly discovered the concept of "moral hazard." This term refers to the effect bailouts of bad investments have on future investment decisions: With the precedent of bailouts in their minds, investors are more likely to take imprudent risks.

While all three of the major news weeklies picked up on this theme with LTCM, most still haven’t connected it with the International Monetary Fund (IMF) and its role in bailing out investors worldwide.

"Washington and Wall Street buzzed last week with outraged talk of ‘moral hazard,’ and for once it didn’t have anything to do with Bill Clinton’s sex life," writes John Greenwald in the October 5 Time. "Instead people were talking about the danger created when government backing for private lenders encourages them to take bigger risks — in search of bigger rewards." According to Greenwald, the "fear is that the Long Term Capital bailout could encourage banks to make still more risky loans, confident that the government won’t let them get into trouble."

The October 5 Newsweek also notes the moral hazard aspects of the LTCM bailout. It quotes former Federal Reserve Vice Chairman Wayne Angell, who said, "The appearances of this are just horrible. We complain about Russia and Japan and their insider dealings, and then the Fed comes along and seems to be helping out every reckless fat cat." Newsweek also quotes Lawrence Tisch, whose family owns the Loews conglomerate and competes against those covered by the too-big-to-fail doctrine. "His problem," according to the magazine’s Wall Street Editor, Allan Sloan, is that "giant competitors can take excessive risks while Loews accepts lower returns because it has to be prudent."

Not to be left out, U.S. News & World Report’s Phillip J. Longman and Jack Egan reported, in the October 5 issue, that many "Wall Street observers are alarmed by the precedent the New York Fed may have set by brokering the LTCM bailout." They quoted an investor who said, "The Fed, which is supposed to protect the sanctity of the dollar, is now stepping in to bail out hedge funds," and wondered, "Who will be next, the Beardstown Ladies?"

But all of this acknowledgment of moral hazard hasn’t, by and large, led the news weeklies to apply it to the IMF. Only one story over the past four months — a September 28 U.S. News & World Report article by Longman and Egan — mentioned moral hazard in relation to the IMF. "In effect, while the IMF punishes ordinary citizens by imposing various austerity measures, it protects even the most foolhardy foreign speculators from the consequences of their own mistakes," they write. "As a result, critics argue, the agency winds up encouraging more overinvestment and the speculative booms and busts that go with it."

But the lesson the two draw is not that international institutions should first do no harm, but that they should be given more power. Some experts, they report, are calling for "a global New Deal — a set of new institutions that would save global capitalism from itself by taming its excesses." Without quoting opponents of such ideas, they lament that with regard to the creation of such new institutions, "strong leadership, at least from the United States, isn’t in the cards."

But at least they mentioned moral hazard in relation to the IMF. Most other reporters still haven’t gotten that far. If a bailout of a high-profile hedge fund in the U.S. sends the wrong signals to investors, then won’t IMF bailouts overseas do the very same thing?

— Rich Noyes