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Inefficient markets

The wobble in global markets illustrates the dilemma of regulation: do nothing and you face disaster; bail out speculators and you encourage more recklessness

By Michael Prest   September 2007

When a financial crisis erupts, there is usually an urge to identify perpetrators and see them suffer. Letting the speculators go bust seems fair as well as satisfying. Markets giveth and markets taketh away. But the credit crisis that has enveloped financial markets this summer is a lesson in the complexities of market management: if you do not intervene, you risk damaging the market as a whole and harming the innocent as well as the guilty; if you bail the speculators out, you risk encouraging even more reckless behaviour the next time—what is known in the trade as “moral hazard.”

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