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.
“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.”
“Public and private debts are at record heights all over the world,” Hülsmann wrote. “These effects cannot be neutralized, avoided, or diminished through anticipation.”
Ben Giles is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.
