Moral hazard: past, present, and future

"Moral hazard" is shorthand for the idea that if I get rewarded when I take risks that pay off, and if someone else bears the consequences when I take risks that don't pay off, then I'm probably going to take a lot of risks.

I first learned the term only within the past few months, while reading analyses such as this one:

In our financial system, all the truly enormous negative black swans are, ultimately, insured by the government. It's not just Fannie which has an implicit government guarantee: if a big bank or a big insurer or a big fund manager suddenly implodes, then the government is very likely to somehow step in and fix things.

I was surprised to learn that the phrase "moral hazard" is not new; it's centuries old.  And our financial regulators were very much conscious of "moral hazard" well before the extraordinary events of 2008 -- the following comes from a keynote speech given by Ricki Helfer, Chairman, Federal Deposit Insurance Corporation, at a Symposium on January 16, 1997, regarding "the Banking Crises of the 1980s and Early 1990s:"

For the thrift industry in the 1980s, moral hazard contributed to huge losses in the savings and loan insurance fund, to its ultimate failure, and to substantial costs to the taxpayer. What began as an asset/liability mismatch problem, aggravated by rapidly rising interest rates in the beginning of the decade, became an enormous credit problem as real estate markets collapsed. Weak regulatory oversight and the lack of resources to close insolvent thrifts encouraged some institutions to speculate widely in real estate and other ill-conceived efforts to "grow" out of their problems.

And what exactly was "moral hazard" in the context of the S&L crisis?

The problem of moral hazard occurs when insurance induces the insured to take more risk than they would take if they were not insured. Any deposit insurance fund, any form of insurance, in fact, faces the problem of moral hazard. With deposit insurance, the insured party is the depositor. Insurance permits insured depositors to ignore the condition of their institutions. Even fundamentally unsound institutions may have little difficulty obtaining funds. Because insured depositors may no longer have an incentive to monitor and discipline their institutions, the managers of those institutions may take more risks than they otherwise would. In short, deposit insurance can create opportunities for managers to make high risk/high return investments, without the market discipline of having to pay creditors to take that risk.

Unlike the S&L crisis, which involved the government stepping in to back up deposit insurance that was explicitly provided to depositors, today's crisis involves the government stepping in to back up "implicit guarantees" of  "too big to fail" institutions. This has prompted commentary along the lines of this proposed "principle for a Black Swan-proof world" from Nassim Nicholas Taleb:

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

Are financial policy makers are prepared to follow Mr. Taleb's proposed "principle?" I don't see a lot of evidence that they are. If not, then what new kinds of "moral hazards" can we expect to encounter?