The problem of “moral hazard” has existed for as long as there have been markets. It refers to the danger that market participants take excessive risks, if they believe someone will bail them out if things go wrong.

This was true when credit decisions were taken by banks. It is no less true now that those decisions have been out-sourced to the credit markets.

Regulators’ dilemma remains unchanged. A bail-out may be needed to stop a financial crisis turning into economic collapse. But only as a last resort. Banks that make too many bad loans - in other words, did a bad job of banking - could not expect a hand-out from the government.

And it looks as though the Federal Reserve, the main regulator overseeing the subprime mortgage debacle, still adheres to that principle. Funds, like the Bear Stearns fund whose value went to zero last week, that bought too many bad subprime securities have done a bad job of investing. Tough.

If such funds think the Fed may help them out, they should listen to these words from William Poole, head of the St Louis Fed, last Friday: “The punishment has been meted out to those who have done misdeeds and made bad judgments. We are getting good evidence that the companies and hedge funds that are being hit are the ones who deserve it.”

The bad news for these people is that they will lose money. It also makes a “bail-out” rate cut for the market look less likely.

But there is good news. Ben Bernanke said last week that as much as $100bn could be lost before bad subprime loans work their way through the system.

But the Fed seems confident that losses will stay at a level that does not pose a systemic risk to global markets, and can even help reduce moral hazard.

The Fed’s role in brokering a bail-out by banks for Long-Term Capital Management in 1998 remains controversial - former chairman Paul Volcker was fiercely critical. If it did indeed heighten moral hazard, this is a chance to readjust the balance.