Moral Hazard

Richard Posner, a judge on the Seventh Circuit Court of Appeals, has a post at his blog with Gary Becker on why the Fed shouldn't bail out those who took on too much risk in the housing boom:

Studies in cognitive and social psychology have identified deep causes for the overoptimism, wishful thinking, herd behavior, short memory, complacency, and naive extrapolation that generate speculative bubbles--and that require heavy doses of reality to hold in check. Any efforts to soften the blow will set the stage for future bubbles.

The rest is worthy of your time as well.