Question

How the concept of moral hazard can be applied to the 2008 financial crisis?

Answer 1

First, let's understand what is moral hazard.
Moral hazard means a lack of initiative to safeguard against the risk when one knows they are protected from that risk. For example protection by insurance or guarantee.

In 2008 crisis. There was a huge moral hazard. It lead to structural failure of the system. When "Too big to fail companies," thought they were too big to fail and did actions according to it. Banks wrote Loans, imitated OCD, thinking that the counterparty would bear all the risk of default. Unreasonable loans were given to people who don't deserve to get loans. Banks, insurance companies thought that eventually, the government will bail them out if they fail (deep somewhere they had that confidence), because if they were not bailed out then entire USA economy would turn around to crisis. It would affect the whole world due to systematic risk and structural failure.

It created a moral hazard. Which eventually lead to the subprime mortgage crisis of 2008.