Our Moral Hazard

During confirmation hearings last Thursday, members of the U.S. Senate grilled Federal Reserve chairman Ben Bernanke. Although senators criticized Bernanke for his policy decisions, they missed an opportunity to shine light on the ethics of the Federal Reserve’s core function—money production—which affects billions of people around the world.

Senators were more concerned about high-profile economic problems. In a play on words, Sen. Jim Bunning, R-Ky., called Bernanke a “moral hazard” (a term referring to the temptation the Fed creates for risky bank behavior by bailing out failed banking investments).

The nation would have been better served if Bunning had questioned the morality of the Fed itself. As Bernanke said in his testimony, the Fed’s most important tasks are to promote full employment and maintain price stability (keep inflation in check). They do this primarily by manipulating the amount of money in our financial system. So how is the Fed doing? Since it was created in 1913, the value of the dollar has depreciated 95 percent. In other words, a 1913 dollar would be worth less than 5 cents today, or it would take $21 today to match the value of $1 in 1913.

How did this happen? In Biblical terms, we’ve allowed our federal officials to create a monetary system based on dishonest scales and weights. The policy explanation is that our federal representatives, with good intentions, enabled laws and regulations that allow for the unintended destruction of the value of our currency. While Congress and voters focus on the macro picture of economic aggregates like gross domestic product (GDP), we overlook the micro picture of how Federal Reserve action affects people.

When the Federal Reserve creates billions of dollars to bail out business, finance our disgraceful deficit, and promote full employment, it devalues our currency and causes massive economic disruption at home and around the world, because the dollar is the world’s most important currency. Literally billions of lives are affected by the Fed’s moneymaking keystrokes . . . or use of dishonest scales and weights.

Oil prices rise, people lose jobs, the cost of heating homes goes up, commuting becomes more expensive, food prices jump, and family budgets get squeezed. Stock markets and 401(k) accounts crash, seniors postpone retirement, and nonprofit organizations have less money to assist the needy. The value of pension checks dwindles and older Americans struggle to make ends meet. Foreigners loan our government money and we cheat them by repaying them with devalued currency. And so on. These are the very real ethical dilemmas caused by the moneymaking powers we the people, via our elected officials, give to the Federal Reserve.

“The production of money has an enormous impact on the relationships between human persons and groups such as families and private associations,” writes Jörg Guido Hülsmann in The Ethics of Money Production. “All of this is important from a moral and spiritual point of view. Yet it simply vanishes from our intellectual radar screen if we look at money and banking only through macroeconomic spectacles.”

Senators missed a golden opportunity last Thursday to take off their rose-colored glasses and focus the nation on the ethical foundation of the Federal Reserve System. Because voters elect officials charged with overseeing the monetary system, the citizens of the United States of America are responsible for the moral hazard we have created. We need to look in the mirror and have a long, hard discussion about the ethics of money production. And there’s no better place to begin than in the Christian and Jewish communities, because God commanded His people in Leviticus to use honest scales and honest weights.