The Downfall of America's Economy

Campus Report ^ | June 11, 2008 | Ben Giles

[bs9021]

The Downfall of America’s Economy

by: Ben Giles, June 11, 2008

If Jörg Guido Hülsmann wrote a letter to U.S. Federal Reserve chairman Ben Bernanke, it might sound something like this: “Your entire monetary policy is going to crash and burn in the next 30 years.”

In an article titled “What Causes Moral Hazard,” Hülsmann argues that the American economy is creating a financial bubble that could soon burst. It’s all thanks to moral hazard, the prospect of poor financial decisions being made in the economy due to negative incentives.

“Moral hazard entails market failure,” Hülsmann wrote. “It brings about a different allocation of resources than the one that would exist in the absence of moral hazard.”

Applying this concept to the U.S., Hülsmann concludes that the government is the source of those negative incentives.

Banks, companies, and individual citizens use and abuse paper money, the system of legal tender provided by the Federal Reserve, thanks to the incentive of government intervention. If an investment goes awry, the government can bail investors out simply by printing more money.

“This means that the market participants sooner or later come to base their plans on the availability of a far greater quantity of goods and services than is really available in the economy,” Hülsmann wrote.

In the case of the American economy, the goods and services that participants overestimate is paper money.

“In short, paper money by virtue of its mere existence produces massive error on a large scale, until the bubble bursts into a crisis.”

Hülsmann’s argument hinges on presumed negative feelings that people have toward government intervention in the economy. If people are forced to lose control of their resources, essentially conceding co-ownership to the government, Hülsmann argues that they will react negatively to actions taken against their will....

[griswold3]

An interventionist government commands property owners to use their resources in a different way than these owners themselves would have used them,” Hülsmann wrote. “…The essence of interventionism is precisely this: institutionalized uninvited co-ownership.”

Exactly. Business owners are concerned with the increasing intrusivness of the government.

[bill1952]

If an investment goes awry, the government can bail investors out simply by printing more money.

Except that our government cannot “print” money.
It buys it, and that one fact is dispositive to the entire theory

Strange how so few understand that we do not just print money.

[DB]

You can't say it is all about American and then say:

“Public and private debts are at record heights all over the world,” Hülsmann wrote. “These effects cannot be neutralized, avoided, or diminished through anticipation.”

The world uses paper money. The world is in the same boat.

As long as we produce things of value that people want we will do okay regardless of what “money” does. If we don't, no form of money will save us.

[RightWhale]

Gold is up $10 today. Buy gold!

[Prokopton]

Except that our government cannot “print” money. It buys borrows it... and in return gives the lender bonds it has just printed.

[Texas Federalist]

Except that our government cannot “print” money. It buys it, and that one fact is dispositive to the entire theory

It "prints money" in that it sets the price of money through the federal funds rate and can increase the amount of money in print by lowering the rate.

[bill1952]

... it sets the price of money through the federal funds rate ...

No, that is the Federal Reserve, which is not part of the Federal government, despite it’s name.

[bill1952]

Actually, the Fed prints the bonds, as well.

The US is simply obligated to pay the bonds when they mature, but the rate for all of them is set by auction.

[Nick Danger]

I'm sure that the author, Ben Giles, is a fine, up-and-coming young fellow who will someday be able to write things that make sense. At this juncture, however, he is still pretty much an idiot who has tried to discuss an article that he clearly did not comprehend. We know this because his essay jumps around from topic to topic, making assertions that are supported by nothing, and which frequently either do not make any sense or cannot possibly follow logically from the premises provided. I suppose it's necessary to allow the interns to get out there and ride without training wheels — how else could they learn? — but this piece is one that could easily have been left where it was found.

Mr. Giles is correct to seize on moral hazard as a precursor to Serious Bad Stuff, and correct to blame the government for creating it by offering bailouts to those who lost their shirts fair and square, by making investment decisions that turned out to be wrong. Yes, over time, that will indeed 'train' investors to take risks they otherwise would not, since they will come to expect to be bailed out if they screw up.

But from there Mr. Giles veers into a rant about paper money, which is a totally different subject and has nothing whatsoever to do with the problem at hand. After all, the government could fund bailouts, and balance its budget at the same time, by the simple device of taxing the population to fund the bailouts. We could even eliminate the paper money, use only gold coins, and still have a government that bails out failed investors by taking gold from other people.

To blame 'interventionist government' and 'moral hazard' on the existence of paper money is silly. Both are a product of a growing sense in America that nothing bad should ever happen; and that if something bad does happen, the government should come and play Big Mommy, kissing the 'owie' and making it all better. Sad to say, more and more people believe that's how the world should work and will vote for that stuff. See Katrina, where voters demanded that the government be responsible for every little thing, for people who didn't have the sense to get out of the way of a hurricane.

[Texas Federalist]

No, that is the Federal Reserve, which is not part of the Federal government, despite it’s name.

It is as much a part of the Federal Government as the EPA, FDA, or any other government agency, only more powerful. It is created by an act of Congress and its Board is appointed by the President. It is part of the Federal Government.

[brydic1]

The vice chair of the Fed Reserve stated today that what we need is more inflation and more unemployment and that will balance everything out. One wonders of the abject stupidity of those appointed to positions of power by our politicians.

[murdoog]

This thread has helped me to realize that I don’t understand monetary policy as well as I thought I did.

Here’s a question I’ll bet somebody here knows the answer to:
If there were x dollars in circulation 50 years ago, and there are x+y dollars in circulation now, where did the y dollars come from? Specifically, where did they originate?

[murdoog]

I admitted in a previous post that I am an ignoramus on money supply, but I’ll post an opinion anyway. Feel free to tell me where I’m wrong. I don’t even care if you are tactful if I learn something.

It looks to me like recent fed policy has created moral hazard. I refer to the multiple rate cuts the fed made to get us out of the 2000-2002 recession. It looked like at least some of them constituted “kissing the owie” as you called it in your post and set us up for a violent correction later.

In general,it seems the fed takes action it shouldn’t to take away short-term pain, which looks like a form of moral hazard to me.

[bill1952]

The Fed is still independent of political fiat.

Look it up.

[Texas Federalist]

The Fed is still independent of political fiat.

Not so. The Fed could be ordered to take any action or desist from taking any action by an act of Congress. It can also be disbanded tomorrow by a mere majority vote in both houses and the signature of the President. Although it acts autonomously as long as Congress chooses not to interfere, it is still an agency of the federal government.

[Nick Danger]

It looks to me like recent fed policy has created moral hazard.

Rate cuts by themselves don't relieve anyone of the responsibility for their actions. Moral Hazard occurs when investors know in advance that if their investment goes sour, someone will come and bail them out. Knowing this causes them to take risks they would not take if they were facing the loss of their own money. If this happens on a wide scale across the economy, huge amounts of investment capital end up going into high-risk ideas. It's a good thing if some investment capital gets put into "flying leaps" — that's where innovation comes from. But flying leaps are not an appropriate place to put 60% of a retirement fund.

It is true that a lower interest rate could lead you to make an investment you might not otherwise do, but that's the point. Let's say you know that if you open another pizza parlor, you can make 8% on your money. If you had to pay 9% to borrow the money to open the store, you wouldn't do it. If the interest rate dropped to 5 or 6 per cent, you would. Opening the store creates 6 jobs right in the store, and perhaps another 6 up the supply chain. That's how lowering interest rates helps get out of a recession. But there's no moral hazard created, because whether the pizza parlor succeeds or fails, you're on the hook to repay the loan. If you end up having to lay everybody off and close the doors, too bad... you're out your whole investment. Contrast that with what Nancy Pelosi wants to do for foreclosed homeowners. "Buy too much house? In over your head? No problem, Big Mommy will beat up Mister Nasty Banker and you won't have to pay it." Once that becomes the game, everybody will be buying too much house. That's moral hazard.

[bill1952]

Ummm. Perhaps we are on the same page.

any of what you cited is well more than mere fiat.
An act of Congress could do practically anything short of repealing the Constitution, and getting that type of consensus is pretty far fetched these days.
Although not impossible, I suppose.

And if the constituent Banks that collectively make up the Fed refuse to go along then the dictates of the Fed itself wouldn't mean spit when they simply leave.

After all, it really is their money that they are gambling with by buying those bonds for resale.

I cannot imagine anything short of a declared War that would cause the Congress to mess with the most successful financial infrastructure in the world today by taking the extraordinary step of attempting an Act of Congress.