Economists explaining why bailouts cause those being bailout to take riskier behavior

From the WSJ, some pretty simple economics.

Over the past few days, economists here highlighted the many ways in which the lessons of the crisis have yet to sink in. Few think the U.S. and other governments have made needed repairs to the financial regulatory system. And some suggest governments' response has increased the chances of a repeat, making the banking system more crisis-prone, putting new strains on institutions such as the Federal Reserve and stretching government finances closer to the breaking point.

"Our response has made us more vulnerable to a bigger crisis," said Tom Sargent, a New York University economist. "It's distressing."

Banks present the most immediate worry. By providing massive bailouts to commercial banks and securities firms, the logic goes, governments have given bank executives a sort of catastrophe insurance -- and an incentive to take even greater risks than they did before the crisis. But it could take years for policy makers to impose the controls, such as tougher capital requirements, that would prevent the pain from spreading to taxpayers and the broader economy next time the banks get into trouble. . . .