Friday, November 26, 2010

Debt, Moral Hazard, Praxeology

There is a common thread through most of Professor Krugman’s essays; Selective Moral Hazard.

He believes in the concept of moral hazard, but apparently only for bankers. I agree with the conclusion of today’s essay, I just wish he were more consistent in his application. Were we to take into consideration moral hazard when implementing economic/public policies affecting individuals we would bring personal responsibility and praxeology back into our economics.

As a good Keynesian Leftist (excuse the redundancy), Professor Krugman believes government should take responsibility for solving the current financial mess. And in applying moral hazard to this situation it would be logical to ask government to solve a problem for which they are primarily responsible. But that would be like asking a committed AND currently intoxicated alcoholic to run an AA meeting. It’s a mockery.

Our financial system is built on a scheme that has been gradually implemented over the last 100 years. We’ve made the transition from the gold standard to a complete fiat monetary system in several stages, culminating in Nixon’s closing of the gold window in 1971. At that point all international currencies were floating, each against all the others, and countries could no longer exchange American dollars for gold. But money has been created by debt for many, many years because that’s what a fractional banking system does, it creates money through debt. But 100 years ago, at least SOME of the money was back by gold. Now, none of it is. We are currently on a debt standard. Practically all money is created by debt and backed by the economic strength of the issuing country or in the case of the Euro, countries; Hence the problem.

We are reaching the limits of the “debt standard”. Eastern philosophy embraces Yin and Yang and the ebb and flow of change. Everything changes and nothing lasts forever. This debt standard will come to an end. With what shall we replace it? Anything we do will be painful. We could start all over with new debt but it will start us back on the same road. We know where it ends. Perhaps we should take another look at gold. It too will be painful and to implement a classic gold standard would require going back to a true laisser-faire economic system. But doing that would also apply moral hazard equally to all participants in the economy; bankers as well, with bad decisions resulting in bankruptcy. What could be more fair that that?

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