Editing Economic bubble (section)

====Moral hazard====
[[Moral hazard]] is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. A person's belief that they are responsible for the consequences of their own actions is an essential aspect of rational behavior. An investor must balance the possibility of making a return on their investment with the risk of making a loss – the [[Risk-return spectrum|risk-return]] relationship. A moral hazard can occur when this relationship is interfered with, often via [[government policy]].

A recent example is the [[Troubled Asset Relief Program]] (TARP), signed into law by U.S. President [[George W. Bush]] on 3 October 2008 to provide a government bailout for many financial and non-financial institutions who speculated in high-risk financial instruments during the housing boom condemned by a 2005 story in ''[[The Economist]]'' titled "The worldwide rise in house prices is the biggest bubble in history".<ref>{{cite news |title=In come the waves: The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops. |newspaper=[[The Economist]] |date=16 June 2005 |url=http://www.economist.com/opinion/displaystory.cfm?story_id=4079027 |quote=The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.}}</ref> A historical example was [[Tulip mania#Legal changes|intervention by the Dutch Parliament during the great Tulip Mania of 1637]].

Other causes of perceived insulation from risk may derive from a given entity's predominance in a market relative to other players, and not from state intervention or market regulation. A firm – or several large firms acting in concert (see [[cartel]], [[oligopoly]] and [[collusion]]) – with very large holdings and capital reserves could instigate a market bubble by investing heavily in a given asset, creating a relative scarcity which drives up that asset's price. Because of the signaling power of the large firm or group of colluding firms, the firm's smaller competitors will follow suit, similarly investing in the asset due to its price gains.

However, in relation to the party instigating the bubble, these smaller competitors are insufficiently leveraged to withstand a similarly rapid decline in the asset's price. When the large firm, cartel or ''de facto'' collusive body perceives a maximal peak has been reached in the traded asset's price, it can then proceed to rapidly sell or "dump" its holdings of this asset on the market, precipitating a price decline that forces its competitors into insolvency, bankruptcy or foreclosure.

The large firm or cartel – which has intentionally leveraged itself to withstand the price decline it engineered – can then acquire the capital of its failing or devalued competitors at a low price as well as capture a greater market share (e.g., via a [[Mergers and acquisitions|merger or acquisition]] which expands the dominant firm's distribution chain).  If the bubble-instigating party is itself a lending institution, it can combine its knowledge of its borrowers' leveraging positions with publicly available information on their stock holdings, and strategically shield or expose them to default.