Federal Reserve now admits that Moral Hazard in Banking and Finance is a serious problem

Sankarshan Acharya
Founder, Pro-Prosperity.Com

May 23, 2014

Since I first mimeographed a paper at the Federal Reserve Board (Washington, D.C.) in 1991 on efficient resolution of moral hazard in banking and finance, I have faced many unseemly questions from Fed officials and associated academic pundits, for example:

  1. "How do you know moral hazard exists?"
  2. "Can you prove/test that moral hazard exists?"
  3. "Who are 'you' to tell how 'our' banks should be regulated?"

The latest version of that paper is available at http://pro-prosperity.com/Research/moralhazardliberty.pdf

The Federal Reserve has now officially admitted (in a speech of Philadelphia Fed Chief on April 8, 2014) how moral hazard has made the system go haywire and how the Dodd-Frank Act of 2010 does not solve the problem. 

This belated admission by the Federal Reserve is after (a) 23 years of my selfless pursuits within the profession and communication with the US Congress and Presidents, (b) a financial crisis wiped out trillions of dollars of hard-earned wealth and millions of jobs with the economy plunging into a financial catastrophe in 2008, which was worse than the Great Depression according to the Federal Reserve, (c) the Congress blamed, in its Financial Crisis Inquiry Commission Report of 2011, the Fed and academic pundits for causing the avoidable economic crisis, and (d) I recently circulated a series of memos on resolution of moral hazard:

The Fed has said on April 8, 2014, e.g., "If creditors perceive they will be rescued, then market discipline is undermined and moral hazard will lead to greater risk-taking by the institutions. It is important to recognize that the moral hazard problem is not mitigated by eliminating the potential for government support. It doesn’t matter where the money comes from to rescue creditors. Any means of providing an implicit or explicit subsidy to protect creditors undermines market discipline and creates moral hazard. Without an effective and credible resolution regime that ensures no subsidies to creditors, there is less incentive for markets to monitor a firm’s risk—thus, the firm’s risk would not be accurately reflected in security prices.” The entire speech of the Fed is available at http://finance.yahoo.com/news/charles-plosser-must-know-solution-210009352.html

The Federal Reserve is, however, yet to acknowledge the following:

  1. How the Federal Reserve and the mega banking cartel (23 Clearing House members) it regulates have legalized privilege (through laws, rules and policies) to indolently usurp the hard-earned wealth created by those who persevere to produce and serve to prop the economy.
  2. How such indolent usurpation is inefficient (decaying social competitiveness), unstable (causing anxiety among the persevering to stop working and to not pay their bills) and unconstitutional (fundamentally unfair).
  3. That an efficient, stable and constitutional alternative which can be practically adopted is presented in my papers including one “Constitutional System of Money and Finance,” published in the Journal of Financial Transformation, and available at http://pro-prosperity.com/Research/Constitutional-Monetary-Finance-System.pdf

In any case, I welcome the secret downloads of my papers and memos (some of which go viral from time to time) from my site, pro-prosperity.com and hope that the economy and society will be ultimately guided by an efficient, stable and constitutionally fair system.


Dr. Sankarshan Acharya
Founder, Pro-Prosperity.Com and Citizens for Development