Sir, Amity Shlaes ("Remember the moral hazard of bail outs," May 2) is right on target; Congress does not make the connection between disasters such as the savings and loans collapse and its own policies.

The Pension Benefits Guaranty Corp's enormous liability is only the latest example of the U.S. government's well-intentioned efforts gone awry and creating taxpayer risk.

Ironically, however, deposit insurance is the one area where moral hazard has been somewhat weakened. After the S&L and banking crises of the late 1980s and early 1990s, Congress substantially changed the structure of deposit insurance by limiting the Federal Deposit Insurance Corporation's ability to rescue anyone other than insured depositors, and giving the FDIC the power to increase banks' insurance premiums whenever the insurance fund falls below a specified level.

The result is that large depositors have an incentive to exercise market discipline and the taxpayers are no longer at risk for deposit insurance. Although the FDIC continues to administer the deposit insurance program, the capital of all US banks--which can be tapped to cover losses as a result of bank failures--now stands behind insured deposits in the U.S.

Banks themselves, then, have an incentive to monitor one another, providing yet another level of market discipline.

Peter J. Wallison is a resident fellow at AEI.