1-How the concept of moral hazard can be applied to the story of the movie (1 paragraph)? 2- What is your impression about the movie (1 paragraph)? 3- What could have been done to prevent the crisis from occurring (1 paragraph)? No more than 1 page, 1 inch all around margins, Times New Roman 12-point font, single space.
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The movie, Inside Job (2010), is an American documentary film describing the antecedents and
consequences of the 2008 financial crisis. You can rent it online at an affordable cost (either
Amazon Prime Video, $2.99; YouTube, $3.99; or VUDU, $0.99). Please refer to the movie
Inside Job (2010), Director: Charles Ferguson, Narrated by: Matt Damon
Please read the following instructions carefully!
Upload your report on Canvas Assignments the Movie Report section before the deadline (1
pm, 4/28). No excuse will be accepted.
No more than 1 page, 1 inch all around margins, Times New Roman 12-point font, single space.
10% of your final grade (100 points).
o How the concept of moral hazard can be applied to the story of the movie (1
o What is your impression about the movie (1 paragraph)?
o What could have been done to prevent the crisis from occurring (1 paragraph)?
By Justin Pritchard
Moral hazard is a situation where somebody has the opportunity to take advantage of
somebody else by taking risks that the other will pay for. The idea is that people might ignore the
moral implications of their choices: instead of doing what is right, they do what benefits them the
The Concept of Moral Hazard
The concept of moral hazard comes from the insurance industry. Insurance is a way to
transfer risk to somebody else. For example, an insurance company will pay up if you damage a
rental car (and you have the proper insurance in place). In exchange, you pay a price that seems
fair, and everybody wins. The assumption is that neither you nor your insurance company
expects any damage to occur. The insurance company uses statistics to estimate how likely the
vehicle is to be damaged, and they price their services accordingly. But there are times when you
might have more information than your insurance company. For example, you might know that
youre going to drive into the mountains on rough, narrow roads. So you get the most generous
insurance coverage possible, and you dont worry about bouncing over rocks or scratching the
paint in thick brush along the side of the road. In fact, you have a perfectly good car at home, but
theres no way youre going to drive your car up that road. Moral hazard says that you have an
incentive to take risks that somebody else will pay for: you get to go where you want, and you
dont suffer the consequences. The more insulated you are from risk, the more temptation you
Moral Hazard and Loans
Moral hazard became an important consideration (in some cases after the fact) during
the financial crisis around 2008. There are two ways to think about moral hazard and loans.
Lenders were very eager to approve loans prior to the mortgage crisis. Some mortgage
brokers encouraged subprime borrowers to lie, or they altered documents to make it appear as
if borrowers were able to afford loans that they really couldnt afford. For example, sometimes
inaccurate income numbers were reported, or no documentation was required to prove
claims about ability to repay. Why would lenders hand out money when they dont really know
if theyll get repaid especially if they have to lie to get the loans approved? In many cases, the
lenders were only originating (or selling) the loans. After the loan was approved and funded,
lenders would sell the loans to investors who later lost money. In other words, the lender took
little or no risk (but the lender had an incentive to put risk on somebody else, because originators
get paid for making loans). Whats more, lawmakers and the public became scared. They
worried that if major banks collapsed (some of them were loan originators, while others held
risky assets), they would bring down the US economy not to mention the global economy.
Because these banks were considered too big to fail, the US government helped some of them
weather the economic storm: if those banks suffered large losses, the government promised to
protect deposits (in some cases through the FDIC). Of course, the US government is funded by
taxpayers, so the taxpayers were ultimately bailing out the banks. In other words, lenders
and investment banks took risks that were borne by taxpayers.
Moral hazard also became an issue for borrowers. As millions of homeowners struggled
to pay their mortgages and defaults skyrocketed, government programs offered relief. People
could avoid foreclosure thanks to funds and guarantees from the US government. Some worried
that borrowers would actually have an incentive to walk away from their mortgages: they
were underwater on home loans, and some might be tempted to get government aid that they
didnt need. In some cases, their credit might suffer, but in other cases borrowers would come
out unscathed (in some ways at least struggling borrowers almost certainly experienced
financial hardship and emotional stress).
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