“The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: ‘The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.’)”
More than a decade later, the beat goes on. Massive government deficits financed by bloated central bank balance sheets continue to tamper with financial markets and the economy. This isn’t your great-granddaddy’s capitalism. Damn, it’s not even your granddad’s version. Hell, even your own father probably wouldn’t recognize it. In today’s capitalism, everyone gets bailed out in a crisis. And I mean everyone ─ airlines, small businesses, so-called fallen-angel bonds ─ and now, the US government is even considering aid for the battered oil industry. So much for the good old days of caveat emptor, let the buyer beware. Last time I checked, running a business, extending credit to issuers of junk bonds and drilling for oil were supposed to be risky propositions.
Not to worry, I get the strange irony in my logic. The chief investment strategist from a systemically important financial institution (SIFI), employed by an industry notorious for being shamefully bailed out during the global financial crisis (GFC) is now whining about moral hazard? C’mon, man! But, folks that read Uncommon Sense regularly and have had the opportunity to hear me speak about moral hazard know that I have been railing against government and central bank interference in markets and the economy for a very long time. Perhaps during a crisis ─ especially one not of our own making, such as the COVID-19 pandemic ─ bailouts are the humane thing to do. However, they come with some very serious, long-lasting consequences.
Waste Not, Want Not?
In November 2008, a few short weeks after accepting the appointment of White House chief of staff for President Barack Obama, Rahm Emanuel famously said, “You never let a serious crisis go to waste. And what I mean by that is it's an opportunity to do things you think you could not do before.” Boy, has Jay Powell, current chairman of the Federal Reserve (Fed) ever taken that advice to heart. He is not to be outdone by The Maestro Alan Greenspan’s policy response to the bursting of the technology, media and telecom (TMT) bubble. Or bested by Helicopter Ben Bernanke’s approach to conquering the GFC. Bazooka Jay and his merry band of monetary policymakers have unleashed the greatest and most creative crisis policy response in the history of central banking.
There aren’t enough superlatives to describe what the Fed has done to combat the negative market and economic consequences from the COVID-19 pandemic. The monetary policy playbook that was created in the aftermath of the GFC paved the way for Powell and future central bank leaders. It’s granted them permission to implement once unimaginable policy solutions. In fact, it’s put monetary policymaking on steroids. Bernanke only talked about dropping money from helicopters. Powell in partnership with Treasury Secretary Mnuchin has practically done it! This evolving new approach to monetary policy during a crisis may never be walked back.