Wait if you don't pay back the loan it's "free money" so I don't think people who get into lot's of debt and then default are necessarily idiots. People pay back loans so they can get more loans or get rid of the lean on the car / home. Borrowing 200k and making a 50/50 bet could be a great investment if you could live without credit for a few years.
The credit crysis comes down to bad statistics. When lenders assume a default rate and ignore how dependent this is on the economy they make bad decisions. Home loans in Detroit are a great example of this.
If you are talking about a moral hazard on the consumer side I have to say I think it's rubbish.
The possibility & unpredictability of a bailout & the terms under which you can get free money are such that it's insanely risky trying to take advantage of it. Swaying stock prices by a couple of percent b is one thing. An individual risking all of his own wealth is something else. Virtually no sophisticated investors would take advantage of it.
The overwhelming market signal should remain: do not borrow more then you can repay.
The credit crysis comes down to bad statistics. When lenders assume a default rate and ignore how dependent this is on the economy they make bad decisions. Home loans in Detroit are a great example of this.