The savings and loan crisis of the early 1990s was caused by a moral-hazard problem because:
A) government insurance encouraged bank managers to take on more risk than they would have without such insurance.
B) bank managers no longer attempted to maximize the profits of the firm.
C) insurance attracted depositors who would not have used banks otherwise.
D) depositors had more information about the banks than shareholders had.
E) government insurance encouraged bank managers to take on less risk than they would have without such insurance.

Question

Quizplus · Accepted Answer

The moral-hazard problem refers to the fact that individuals or institutions may take on more risk than they would have without insurance protection, as they are protected from the full consequences of their actions. In the case of the savings and loan crisis, the government insurance provided by the Federal Savings and Loan Insurance Corporation (FSLIC) encouraged bank managers to take on more risk, as they were protected from losses if their investments failed. This led to a large number of risky loans and investments, which ultimately caused many banks to fail and required a costly government bailout.

The Savings and Loan Crisis of the Early 1990s Was