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Central Banks and the Moral Hazard of Bad Bets

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Central Banks and the Moral Hazard of Bad Bets

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Central Banks and the Moral Hazard of Bad Bets

Central Banks and the Moral Hazard of Bad Bets

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The Federal Reserve injected $62 billion into the banking system last week, and $2 billion Monday, in the hope of calming credit worries. The next step to help the economy: to lower interest rates, says Bob Rose, executive editor of Smart Money.

The European Central Bank and the Bank of Japan have intervened with large doses of cash as well.

But the role central banks have in stabilizing markets is complicated, as Rose told NPR's John Ydstie. While sending the message that it doesn't want a recession, a move to cut rates would "essentially bail out people who have made bad decisions, or taken risks — and the risks have blown up," Rose said.

The result, Rose says, is that the Fed is walking a fine line, between maintaining order in the markets and solving the problem too soon — which could encourage more speculation and irresponsible behavior.