Uh, this morning I've understood another small element of the edifice of economic theory.
Here's my comment (on this post by Prof. Rizzo) which shows the intuition:
Moral hazard is not only relevant because of deposit insurance: it is relevant whenever costs are socialized.
If I invest too much now, together with everybody else, in a private-costs world I would expect high interest rates in the future, when there will be a scramble for credit, i.e., investment that raises the demand for capital, as Hayek put it.
When there is the central bank following a countercyclical monetary policy, during the scramble for capital, normally, interest rates don't rise in the short run, and probably also in the long run (the policy intervention will be at least as persistent as the crisis, i.e., the scramble for credit).
Counterfactually, an interest rate that in a private-costs world would have risen to 7-8% at the onset of the crisis, becomes a 0% interest rate because of the central bank. This may be imply great cost socialization… as the counterfactual market interest rate is not observable, however, it is difficult to evaluate if the phenomeon is relevant.
When costs are socialized, the market system is uncapable of retrieving and spreading correct information and forcing correct incentives. All the coordination process goes astray.
Competitive market agents will take moral hazard into account and “optimize” taking the cost socialization technology into account, i.e., they won’t “optimize” to find a “social optimum”, whatever it means.
Systemic risk cannot be avoided because noone has private incentives to avoid it. Only monetary authorities can stop socializing risks, but countercyclical policies work on the opposite principle.