Wall Street has a dream: that the Federal Reserve will rescue financial markets with a sharp cut in interest rates. Behind that dream lurks a problem, something financial people call moral hazard.

Moral hazard is an old economic concept with its roots in the insurance business. The idea goes like this: If you protect someone too well against an unwanted outcome, that person may behave recklessly. Someone who buys extensive liability insurance for his car may drive too fast because he feels financially protected.

The August 25 Economist pipes in further with "Does America need a recession?", implying a little bloodletting will be just the ticket...

Mark Thoma at Economist's View counters with sane reasoning why the economy doesn't necessarily need to get worse to get better and most of his commenters agree. Here are a few points he makes:

• Overproducing housing and creating a glut is not the same as overproducing time sensitive, perishable goods.  Builders just stop building, which is what is happening, until the demand eventually matches supply again. A correction in pricing should be temporary. Housing is only one poorly performing sector (and the most obvious one) in this dynamic economy and it would correct itself quicker with some Fed help.
  
• Refusing to stabilize the economy and forcing a recession seems like misguided policy. Adding my point of view, the lessons of the lower interest rates and the exuberance it caused has been learned. To conclude that the cycle will automatically repeat itself during another low interest rate window is not credible because of hindsight.