The statements from the Governor of the Bank of England, have stirred up debate as they were refuted by the Prime Minister Brown.
King said the use of taxpayers’ money to prop up banks had created “possibly the biggest moral hazard in history” since institutions had an incentive to take risks if they were confident they would be bailed out.
“It is hard to see how the existence of institutions that are ‘too important to fail’ is consistent with their being in the private sector,” King said. “Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources.”
