No principle can provide concrete guidance for how to deal with all the contingencies we may face in a complex and uncertain world, in particular with those uncertainties labelled “unknown unknowns” – a phrase that has no doubt resonated with economic policy makers in recent months.
In this context, it is important to clearly distinguish between, on the one hand, acting in a pragmatic manner to support the functioning of the market as a whole and, on the other hand, bailing out individual institutions and thus generating moral hazard by creating the impression that such institutions will not be held responsible for their earlier actions.