Towards a Worldwide Index of Human Freedom

224 • Towards a Worldwide Index of Human Freedom
banks and other big players on financial markets, it suffered the consequences
of its poor performance in regulation. Unfortunately, the financial
crisis and the response to it has done nothing for mitigating the “too
big to fail” problem, which got worse rather than better. Worse still, rescuing
banks and AIG has reinforced moral hazard.
The second component has been the continuation of the cheap
money policy which was a prerequisite of the crisis in the first place.
Possibly, there was no better alternative to low interest rates and quantitative
easing, i.e., central banks buying government bonds and financing
public deficits by the equivalent of printing money.41 But it should
be emphasized that the extraordinary fear of deflation and its consequences
that politicians, central bankers, and most economists demonstrated
rests on a tenuous empirical basis (Atkenson and Kehoe,
2004). Given the high (and, because of the crisis, more rapidly growing
than ever) indebtedness of most Western democracies, and given
the resulting incentive for governments to lighten the debt burden
by inflation, the long-run problem will be inflation rather than deflation
(Bagus, 2011; Bernholz, 2003; Hayek, 1960).42 The question is
less whether central banks know when and how to tighten monetary
policy than whether the politicians shall let them do what is necessary
sooner or later. Here, I must admit deep pessimism. As Friedrich August
von Hayek (1976/2008) recognized in the 1970s, money might be too
important to leave it to the politicians. We might need to wrest control
of monetary aggregates from politicians and politically appointed
central bankers by either returning to some kind of commodity-based
money or by the privatization of money. According to Hayek, the future
of individual liberty and economic freedom might depend on it.43
for the lion’s share of the losses, but relief for the banks was quite profitable. Of course, the
financial crisis also affected growth rates and government revenue and therefore public
debts. According to Reinhart and Rogoff, the real stock of debt tends to come close to
doubling within three years after financial crises (2009: 170).
41 Hummel argues that Bernanke’s Federal Reserve (Fed) did not flood markets with liquidity
in response to the financial crisis, but that it redirected it, thereby becoming something
like a central planner of the American economy (2011: 509). In the summer of 2008, the
Fed’s lending to banks was sterilized by its selling of Treasury securities.
42 Not only politicians, but even some economists (for example, Rogoff, 2011, August 9:
9) favor a higher rate of inflation in order to lighten the debt burden of democratic governments.
Assuming that such a policy is a lesser evil than any alternative, the advice to
politicians to confiscate part of people’s savings implies an indictment of politicians and
a strong verdict about government failure.
43 The most detailed proposal has been made by Huerta de Soto (2009). In his view, the
limited reserve requirements in banking or the creation of credit out of nothing by banks,
which are supported by central banks, are the main culprits for recurrent crises. That is
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