Moral hazards

Even though we are slowly recovering from the “Great Recession,” it is appropriate that we question the means used to revive the economy.

Despite the fact that the methods used apparently were doing well, they could set the stage for trouble later. The problem remains, but few want to dispute the current “success.”

In Canada and the United States the financial authorities decided to use huge dollops of stimulus, sprinkled among banks and many industries, particularly to those in the automobile and housing sectors.

Central banks reduced interest rates to historic lows, and banks were provided with access to funds free of charge, which then could be loaned to get the wheels of the economy going.

No one examined the merits of the mortgages that were granted. They were wrapped in other packages tending to disguise the reliability of the bundle. A leading bank official told his staff to go and sell the product, even though he knew it was junk.

Yet no bank official has been indicted or even reprimanded for such outrageous conduct.

The automobile companies who had been the architects of their own troubles, offered pensions that could not be afforded.

By failing to improve their products and productivity it became apparent that the automobile companies would not survive as they existed. Two of the three went into bankruptcy and were loaned billions of dollars.

Then too, the leading U.S. mortgage companies, Fannie May and Freddie Mac, issued mortgages that buyers could not possibly maintain. Hence, housing prices soared, at least for the time being as buyers were lured by artificially cut interest rates.

Clearly the governments in North America wanted to take any possible steps to shield the public from any pain, regardless of longer term consequences. Federal budgets soared while interest rates were prevented from rising.

Meanwhile Ireland, for example, proceeded on a course different from ours. It had six straight years of austere government budgets, keeping a restraining hand on government spending and welfare cost. Ireland now has a soundly based prosperous economy.

The turnaround in the Irish economy confounded critics who warned incorrectly that as an article in “The Record” of Kitchener wrote “a country cannot cut its way to recovery.”

The United States follows a course that entails trouble, one that eventually leads to distortions and what economists call “moral hazards.”

That is taking on more risk because someone else or other sectors agree to bear the burdens of risk. In other words, these lax policies proceed because it is expected that some others will have the problem of paying them in the long run.

We should take heed of an approach such as that in Ireland, far preferable to our profligate ways of incurring billions of dollars of government debt and money printing-debasing our currency.

In other words, “no gain without pain.”



Bruce Whitestone