Summers calls attention to moral hazard

WASHINGTON, Sept. 18 (UPI) -- White House economic adviser Lawrence Summers told a Washington audience Friday financial recovery includes confronting the "moral hazard" issue.

The concept of a moral hazard involves people not changing their behavior when protected from the consequences of their actions. In the context of financial firms, the term is applied to investors who behave differently knowing the government is there to bail them out of their mistakes.

Summers, director of the National Economic Council, told a Georgetown University audience that government intervention in the financial crisis has worked.

"The recovery program, the fiscal stimulus, the financial stress tests have served to quell panic, drive private capital raising and ultimately pull us out of the vicious cycle," he said.

"In creating this safer system, however, a paramount objective must be to address the issue of moral hazard. A perception that borrowing is supported by government guarantee, explicit or implicit, encourages reckless risk-taking."

The private sector must also "ensure compensation that is aligned with prudent risk management," he said.