Douglas Gale discuss financial fragility as large effects from small shocks. They formalize this idea by considering the case of an economy in which the size of financial shocks approaches zero. They show that even in such an economy there will still be significant fluctuations arising solely from these vanishingly small financial shocks. In their view, banks are risk-sharing institutions where deposits act to insure depositors against a lack of access to money. Even minuscule shocks can set off self-reinforcing price changes. Bailouts Another reason banks might adopt a fragile financial structure is because they expect a government bailout in the event of a financial crisis. This is an example of moral hazard, since the bank engages in risky behavior because it believes it has insurance against downside risks. If the government is considered likely to step in and reduce losses incurred by banks, bankers will have an incentive to take on more risk and increase the financial fragility of the banking system. In general, a bailout is the optimal response of policy-makers once a crisis has occurred (ex post), because the bailout will reduce the negative effects of the crisis on the economy. Before the crisis occurs (ex ante), policy-makers would like to convince banks that they will not bail them out in the event of a crisis so that banks do not adopt a fragile capital structure. However, if policy-makers announce that they will not bail out banks in the event of a crisis, bankers will not believe them because they rationally anticipate that policy-makers will in fact bail them out in the event of a crisis. Policy-makers stated policy of no bailouts in the event of a crisis is not credible, so in the absence of a commitment device banks will take on excess risk. Moreover, some economists have argued that the presence of bailouts will force banks to take on more risk than they would like. In 2007, Charles Prince the CEO of Citigroup was quoted as saying, "As long as the music is playing, you have to get up and dance." More formally, economists Emmanuel Farhi and Jean Tirole have argued that policy in response to a crisis naturally gives greater benefits to those banks that have taken on more leverage. Given this, banks have an incentive to imitate other banks so that they achieve their worse losses when everyone else does, and thus maximally