The global economy is sick and its central bank doctors risk making it sicker. There has been a steady worldwide march toward cheaper credit, in hopes of resuscitating lagging growth. However, this treatment threatens a twofold risk: encouraging moral hazard in the short run and harming the market mechanism in the long run.

The subsidized credit cure is just the logical extension of an illogical focus on symptoms instead of the disease.

Moral hazard is the first threat arising from subsidized credit. The risk of moral hazard increases when the consequences of bad decisions decrease. The more consequences diminish, the greater the threat that risks will be taken. With government-subsidized credit, an investment’s risk of failure is reduced, so its de facto return increases. Confronted with subsidized lending, all parties’ logical economic decision is to take increasing risk.

Subsidized credit distorts market information, just like it encourages risky individual behavior. Properly functioning markets exchange information through the price mechanism. When the price mechanism is distorted - through the subsidization of credit costs and actors’ insulation from the true economic cost of credit, risk and return - the information the market disseminates through prices is distorted, too.

Once distorted, the market becomes dependent on the subsidies distorting it. Why seek paths other than those encouraged by subsidies offering lower risk and higher return?

Ironic indeed that central banks ostensibly aiming for today’s recoveries are following the path of yesterday’s financial crisis - only this time, doing so on a more massive scale, across sectors and continents.