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Commentary from the Free Enterprise Foundation, Issue #09-06 - More Thought Provoking Commentary!
March 24, 2009
You are invited to read the latest commentary from the Free Enterprise Foundation. It will make you think!
Moral Hazard & America’s FutureBy Robert E. Freer, Jr., President of The Free Enterprise Foundation
Whether you are a religious person or not, most Americans grow up in an environment that surrounds them with the Ten Commandments. In what can be referred to as a “civic testament,” these requirements for a moral life are regarded generally as the bedrock of life principles that sustain our social compact. There are several other prescriptions for the right life that we can name: thrift, personal responsibility, hard work, faith in family, belief in freedom and personal liberty, personal privacy and private property. Together with the Commandments, these form the outlines of the field on which we play out our life. I don’t think I am alone in saying I have an emotional connection to these principles and believe most of you do too. Deviation from them raises expectations as to consequences and to what is required to restore the national balance and healthfulness to our union
Today’s hard times are only just beginning to test our adherence to these notions. There is no retreat from the road we have entered at least until the Congressional elections of 2010. Until then we are in the thrall of an Administration and Congress more committed to “never let a crisis go to waste” as the basis for moving this country radically left than to solving the financial crisis that got them elected. I question whether that is what the majority of Americans really want and further lament both the behavior that has created “Moral Hazard” for those who got us here and those who are now directing our future… A pox on both their houses!
Moral Hazard is behavior removed from the core principles described above. We know it is wrong and that it will not work out well for us, yet as a nation we persist. This breakdown, at the least, sets us on a course greatly removed from our history and risks the future of the great land of liberty that has been entrusted to us by our ancestors.
Let me borrow here from former Speaker Gingrich and add a few thoughts of my own, “…And so the American people are presented with a real choice: Which America do we want; an America in which citizens and entrepreneurs are free and hold the power; or an America in which politicians and bureaucrats dominate and are in charge?” Do we want an America where doctors and nurses are punished for adhering to their conscience? Do we want an America that hides from economic truth and postpones our reckoning day by actions that will only make solutions more painful and protracted? Do we want an absolute limit on what a person can earn? Do we wish to further hamstring our business sector with higher taxes that raise prices and eliminate their competiveness with foreign-based businesses? And ultimately, do we wish to send a message that the values we have lived by are untrustworthy and should be shucked in favor of the “flavor of the month” humanist notions of politically correct living?
I am not unsympathetic to those in pain. It is easy to become confused when you start to play the analytical game of “who’s got the Moral Hazard?” Who should pay? The answer is that we all will pay, but It is particularly easy to look for a way out of your share of liability when you have just lost your job and your mortgage company is about to evict you.
Let me submit that free enterprise is not the villain. On the other hand, unethical and unlawful activity by both business and governmental representatives fully warrant the abuse being heaped upon the actors themselves. Business, per se does not. Remember that government never produces anything that is not ultimately paid for by private enterprise. The only wealth we can divide is produced by free enterprise. That our economy has only faltered, not collapsed, is due to the vitality of many businesses, small and large, that have found ways to continue to produce products and services despite the failure of our financial system.
Ironically those in Congress who materially assisted in creating this mess have been given virtually carte blanche to clean it up and instead are making matters worse. Jim Rogers, co–founder of The Quantum Fund with George Soros, recently opined from his base in Singapore: “Terrible. They are making it worse. It’s pretty embarrassing for President Obama, who doesn’t seem to have a clue what’s going on- which would make sense from his background. And he has hired people who are part of the problem….These are people who think the only solution is to save their friends on Wall Street rather than to save 300 million Americans.”
Rogers goes on to say, “Let the bankrupt go bankrupt.” There are plenty of good banks in the wings to pick up the pieces, and he says the same for the car companies. Let the system work. If we keep propping up these failed entities, the pain can only be made worse as the life is sucked out of our economy. For us and the world economy that depends on dollar flows at established currency levels, the very real potential hazard of our misbehavior is the complete collapse of those expectations that hold the economic world together. We risk, by our foolishness, reaping the whirlwind.
As for the bankers, where it is warranted, indict them for their cozy deals that failed to properly represent risks to the public; indict them for their interlocks and conspiracies. Even if you don’t ultimately win on all charges, the message will be clear to their successors to stay in the tried and true vineyard and stop pushing leverage to irresponsible and ungovernable heights.
I note that Paul Volker has recently called for reestablishing the division between commercial banking and investment banking that existed under Glass Steagall, and in this advice I join him. As for those who truly have become victims, a handout that clearly is that, not a reward for flaunting the rules of prudence and personal responsibility at our core, would be both the fair and wise thing to do. We should not, however, in some unguarded moment, allow those who truly cannot afford and should not be obligated to a long term mortgage obligation to be restored to those responsibilities.
As joblessness grows and Congress throws buckets of money at the problem mindlessly in the belief that the shotgun blast of cash will lead us out of our morass, they are only making the tar trap of insurmountable debt impossible to escape. Focused programs of support for enduring infrastructure are one thing. What Congress is about is something entirely different and unacceptable. We have run ourselves into the sickness of a third world nation. We are becoming ever more dependent on a Chinese government unhappy about the return on their earlier investments and suspicious of our ability to right our loan hunger. If the IMF were asked to provide aid to us, they would find our behavior does not meet the tests commonly required of those they have previously helped. We are fast approaching third world status. I fear we run the risk of Weimar Germany where cash, ever more cash, completely undermined their nation and could undermine ours. It is not impossible that we too could be sucked into that vortex and take the world with us.
For those of you who would like to read more on this subject, I recommend Niall Ferguson’s book, The Ascent of Money. It is very readable and informative. He ends by saying,” Financial markets are like the mirror of mankind, revealing every hour of every working day the way we value ourselves and the resources of the world around us. It is not the fault of the mirror, if it reflects our blemishes as well as our beauty.”
Copyright © 2009 by Robert E. Freer, Jr. All rights reserved
About the author: Robert E. Freer, Jr. is President of The Free Enterprise Foundation. He is a Visiting Professor, at The Citadel and elected in 2005 to be their first John S. Grinalds Leader in Residence. A regular contributor to the Mercury, He can be reached by E-mail at The Citadel . Copies of his earlier columns can be found The Free Enterprise Foundation.
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