“We cannot protect all risk in the market, and we should not do it at the risk of the taxpayer.” — Richard Shelby, Alabama Senator

“Moral Hazard” is a pair of buzz words circling lunch tables, office cubicles and board rooms around the world. Why? Simply because the Fed and Treasury are taking matters into their own hands, trying to put an end to the losses wreaking havoc on the global financial system.

And in doing so, our government could be seen as endorsing the reckless lending that led us to this disaster in the first place.

However, what scares me most about these interventions is that some could create a humongous burden on the taxpayer.

The two-year US$85, billion loan from the Fed to AIG this week is an attempt to provide a controlled environment to deal with the pain, spare the financial system from the effects of extreme counterparty risk, protect the real economy and keep the bill off the taxpayer.

So what if the burden of this financial mess doesn’t end up in the taxpayers’ lap? Could there still be moral hazard?

Good question.

Because what kind of precedent are they setting? These are banks and institutions that took on toxic derivatives and securitized debt. They fattened up when times were good, but come crying for help now that the going has gotten tough. How many more will follow expecting the same treatment?

Perhaps this is the real issue.