February 17, 2008
10 Reasons to Be Critical of the Federal Reserve
By James Wilson
The recent collapse in the housing market, the overall economic downturn, and rising inflation cause people to wonder . . . who is to blame? Heather Johnson identifies a good place to start in her piece 10 Reasons to Be Critical of the Federal Reserve. Some choice quotes:
"[R]ate cuts in the late 90’s made startup capital too easy to come by and helped cause the dot-com bubble. Similarly, failing to raise rates in the past few years encouraged the wave of short-sighted, frenzied borrowing that ended so abruptly in 2007." "The Fed always keeps its eyes peeled for signs of inflation, which manifests itself primarily in the prices of goods and services. That means the Fed is keen to deflate any “bubbles” it sees in these markets by taking money out of the economy. It devotes a similar amount of attention to employment figures. Bubbles developing elsewhere, such as in the prices of assets like houses, get lost in the mix. And under Greenspan, they were knowingly disregarded." "[T]the global spread of capitalism has increased the demand for U.S. debt and thereby made investors settle for lower returns (i.e., lower interest rates). This external market force has “substantially weakened” the Fed, according to an economist in the Fed’s Dallas branch. It follows that the central bank’s reliance on setting interest rate goals first — and following up by changing the money supply afterwards — is outdated." "As one critic has noted, 'It has not been lost on the Wall Street titans that the government is the reliable first responder to scenes of financial distress, or that there will always be enough paper dollars to go around to assist the very largest of financial institutions' . . . Bear markets must coexist with bull markets in a truly free market, but the Fed seems bent on eliminating all but the upside. That might work in the short term, but not long afterwards. Moreover, it’s not capitalism at all, but a sort of 'socialism for the rich.'" "No survey of criticisms directed at the Fed can be complete without mention of the seemingly radical argument that the Fed should not exist at all. Proponents of this view, most of whom come from the 'Austrian School' of economics, believe the very basis of current monetary policy is flawed. They think all dollars should be backed by an asset like gold, as they theoretically were until as recently as the ’70s, or at least exist in the reserves of banks. The 'fractional reserve' system the Fed now oversees, in which only a small amount of the money supply can readily be withdrawn from banks, causes an artificial business cycle of 'booms' and 'busts.'
Read the whole thing here. But can we blame the Fed? I'm sure they're doing the best they can, but like all managers in socialistic government monopolies, they can't do a good job because they will never have enough information to make the right call. Imagine if government was responsible for distributing baby diapers, or laptops, and you get the idea. There will be too few or too many. Likewise, the Fed's management of the money supply will result in not enough money or too much. We can break the Fed's money monopoly by passing Ron Paul's "Honest Money Act" and "Free Competition in Currency Act." You can learn more and tell Congress to pass these bills here.
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