The Federal Reserve’s zero interest rate policy and industry bailouts threaten more than just the fragile economy. The very foundation of the social order risks permanent fracturing under this system of moral hazard.
In Human Action, Ludwig von Mises defined society as “joint action and cooperation in which each participant sees the other partner’s success as a means for the attainment of his own.” Without social trust, there is no society. Private property and the division of labor, the hallmarks of a civilization, arise out of cooperation.
In a strictly economic sense, all the malinvestment and capital destruction the Federal Reserve can muster can be overcome in the medium term. Capital gets restructured. However, in the social realm, bad economic policies can do irreversible harm under certain circumstances, especially when money creation is entrusted to a central bank.
The Political Fallout of the New Bailouts
Central banks, however, often work to undermine this cooperation. The latest round of social disruption is seen in the recent surprise decision by the Federal Reserve to not only lower interest rates to zero but also enact unlimited QE—in order to purchase immense amounts of US Treasurys and mortgage-backed securities, among other assets.
The purchase of US Treasurys and mortgage-backed securities amounts to a bailout of investment bankers and the US government, while the rate drop undercuts vulnerable Americans dependent on savings.
If that sounds familiar, it should be noted that the glaring difference between this drastic move and the last comparable one in 2008 is that twelve years ago a recession was already well underway.
During the phone call news conference for the emergency announcement, Fed chairman Jerome Powell assured reporters that negative interest rates aren’t anticipated to be “appropriate” in the future. Even if that is true—which it probably isn’t—much damage has already been done in the form of asset price inflation which has made housing unaffordable to many while mostly inflating the portfolios of the wealthy.
Many see this and will also see how large influential lobbying groups and huge corporations benefit most from the bailouts.
Undermining Social Trust
This is when social trust will get hit the hardest. If it’s already plain that the top of the financial food chain can’t be trusted, it can be expected that some Americans will see only degrees of difference between the ones responsible for inflation and those they perceive to be unfair beneficiaries of it.
Consider the late 2018 Pew Research Center survey that found that 26 percent of American adults feel they’ve been disadvantaged compared to others their own age. The poll found that the lower the household income and education level, the more likely someone would answer that they were disadvantaged compared to their peers.
Although this sentiment might be founded in some truth, the survey also concluded that “low trusters,” those who exhibited low social trust levels, said they had fewer advantages in life 37 percent of the time. The higher the social trust level, the more likely the person was to answer that they had either equal or more advantages than their peers.
Bailouts will contribute to the disintegration of social trust to the extent that moral hazard is institutionalized. If it weren’t for the state “rescuing” the market, bankruptcies would open up opportunities for competitors and entrepreneurs eager to serve consumers in pursuit of profits. Instead, how well will consumers be served when business losses are paid back by the force of government?
Moral hazard also extends to the individual level, and in this election year the Trump administration is fearlessly diving headlong in that direction. It’s currently working out the specifics of how to send roughly $2,000 to every taxpayer as relief for the economic slowdown brought on by governments at all levels in the country. These so-called covid checks won’t be disseminated in accordance with new value created or any goods or services brought to market. They’ll simply encourage the behavior that preceded the giveaway: social distancing and idleness. Moreover, the covid checks will contribute to price inflation as more dollars chase a tepidly growing—or even decreasing—number of goods.1
The Economics of Central Bank–Fueled Inequality
As increasing wages fail to keep up with the cost of living—whether due to asset price (i.e., housing) inflation or consumer price inflation—economic populism and social division will increase.
Even if everyone chose to put off their spending until the next crisis, the Fed’s zero interest rate policy would do them no favors. Those with little time to save up would be even worse off.
As conservative and safe methods of saving are closed off by ultralow interest rates, “Society’s most vulnerable now must enter the stock market or take other kinds of risks just to hold on to their wealth,” Tom Woods writes in his book The Church and the Market.
With the institutionalized moral hazard and political favoritism created by bailouts comes a culture of division that undermines the common good and the prospects of children and their posterity.
Samuel Gregg writes about why culture matters for the economy at the Acton Institute blog, citing David C. Rose’s book Why Culture Matters Most. Rose stresses the importance of “the inculcation of duty-based moral restraint” above other moralistic calls for altruism and the like, because restraint from certain behaviors is what earns social trust. Restraint, however, is more or less the opposite of what we’ll see from central bankers and government officials in the coming years. Society overall is likely to follow.
- 1This inflation need not manifest as increasing prices. It could manifest as a lack of deflation that would have otherwise occured. In either case, the consumer sees fewer gains in buying power than he would have otherwise benefited from.
