Мoral Hazard as One of the Main Reasons for the Financial Crisis of 2007

Abstract

The financial crisis of 2007 was the most difficult challenge the world economy has faced since the "Great Depression". While the Great Depression was mainly caused by problems in the supply and demand chain or factors from the real economy, the financial crisis was caused under the influence of financial innovation and market deregulation or purely financial factors. The main goal of this paper is exploring the basic causes of the crisis through a fundamental historical analysis. A central role in the story is given to the moral hazard which in fact, is a basic factor of the financial crisis. Moral hazard is a behavioral problem and a form of position abuse in order to gain personal benefit while transferring the risk of failure to another party. The research was conducted by explanation of this risk, highlighting its role, by identifying him in a number of historical events that preceded and directly caused the financial crisis. Analyzing all of this emerges an overall conclusion that the crisis was caused under a huge influence of the moral hazard, which means that with better management of this risk, the crisis could have been avoided. This leads to a confirmation of the need for further research on the problem called - moral hazard, and general to the asymmetric information problem. Further knowledge in this field allows us to prevent the occurrence of similar crises. As George Soros said “Once we realize that imperfect understanding is human condition there is no shame in being wrong, only in failing to correct our mistakes”. This is actually one of the main objectives of this labor – to learn from the past in order to prevent similar events in the future.