The Federal Reserve and its Monetary Malpractice is at the core of the American Dream becoming a myth for the vast majority of Americans. Jobs, disposable income and financial security are all under pressure, as the Federal Reserve continues its historic monetary gamble on unproven policies of Quantitative Easing and ZIRP. The Federal Reserve is clearly failing to achieve its dual mandate, as these same policies likewise failed Japan. John Rubino and Gordon T Long discuss how these policies have led to Moral Hazard, which has lead to Unintended Consequences and in turn to Dysfunctional Markets. A broad range of examples for each is laid out for the listener to see how they are intertwined and how they all stem from Monetary Malpractice.

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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August 25th, 2012
SILENT DEPRESSION

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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MORAL HAZARD & UNINTENDED CONSEQUENCES
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September 29th, 2012

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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MORAL HAZARD
In economic theory, a moral hazard is a situation where
a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk.
 A moral hazard may occur where the actions of one party may change to the detriment of another after a transaction has taken
place.
Example: persons with insurance against automobile theft may be less cautious about locking their car, because the negative
consequences of vehicle theft are now (partially) the responsibility of the insurance company.
 A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party isolated
from risk behaves differently from how it would if it were fully exposed to the risk.
Example: the Euro debt crisis, in which the troika of relief funds (aka the ECB, the IMF, and the EC) for heavily indebted
nations like Greece are waiting as long as possible to act. The risks of a money run, and the consequential market crash in
Europe is by far not as detrimental to these institutions as to the indebted nations themselves.
 An individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to
act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.
 One party in a transaction has more information than another.
In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and
intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party
with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the
perspective of the party with less information.
 One party, called an agent, acts on behalf of another party, called the principal.
The agent usually has more information about his or her actions or intentions than the principal does, because the principal
usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of
the principal) if the interests of the agent and the principal are not aligned.
DEFINITIONS
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September 29th, 2012

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES
“a party will have a tendency to take risks because the costs that could incur will not be felt by the party
taking the risk”

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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UNINTENDED CONSEQUENCES
Unintended consequences (sometimes unanticipated consequences or unforeseen consequences) are outcomes that
are not the ones intended by a purposeful action.
Unintended consequences can be roughly grouped into three types:
1. A positive, unexpected benefit (usually referred to as luck, serendipity or a windfall).
2. A negative, unexpected detriment occurring in addition to the desired effect of the policy (e.g., while
irrigation schemes provide people with water for agriculture, they can increase waterborne diseases that
have devastating health effects).
3. A perverse effect contrary to what was originally intended (when an intended solution makes a problem
worse), such as when a policy has a perverse incentive that causes actions opposite to what was intended.
DEFINITIONS
Macro Analytics
September 29th, 2012

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES
“Unintended consequences are outcomes that are not the ones intended by a purposeful action”

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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DYSFUNCTIONAL CAPITAL MARKETS
Exhibit Characteristics such as:
1. Malpractice
2. Malfeasance
3. Mispricing
4. Malinvestment
MISPRICING
=> MALINVESTMENT
=> DYSFUNCTIONAL CAPITAL MARKETS
DEFINITIONS
Macro Analytics
September 29th, 2012

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MORAL HAZARD & UNINTENDED CONSEQUENCES
Dysfunctional Markets exhibit characteristics such as Malpractice, Malfeasance, Mispricing & Malinvestment

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MORAL HAZARD & UNINTENDED CONSEQUENCES
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September 29th, 2012

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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September 29th, 2012
MORAL HAZARD & UNINTENDED CONSEQUENCES

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