Search Blog Posts

Thursday, December 5, 2013

The Fed Turns 100: A Survey of the Critics - Gregory Bresiger

Mises Daily: Thursday, December 05, 2013 by Gregory Bresiger
End America’s central bank because it caused the crashes of 2008, 1987, and 1929 and will blunder again. 

That’s what many critics are saying about the Federal Reserve System (the Fed), which turns 100 on December 23. They note that on the Fed’s watch America has endured numerous bubbles, crashes, and inflationary cycles that have greatly devalued the dollar. The Fed, they say, has caused or aggravated several crashes.

“The Fed’s performance over the century has been abysmal, no matter how you look at it,” says Professor Joseph Salerno, a business professor and monetary expert at Pace University.

“If you say the goal of the Fed was to prevent calamities, then you have to say that it has been a failure,” says William A. Fleckenstein, a hedge fund manager and the author of Greenspan’s Bubbles.

Fleckenstein says he’s seen two bubbles over the past quarter century. He also believes that, under the Fed’s system of easy money, of interest rates of close to zero percent over the past few years that, “the Fed is once again creating a bubble.” The Fed should be abolished, he adds, because it has no accountability for its mistakes.

The length of the Fed’s charter is indefinite, said Fed sources, who would only speak on background. And that is generally the only way Fed sources will speak when asked about the bank’s current policies or historical record.

What is the Fed?

The Fed is a bank for banks that creates money. It is designed to be a lender of last resort to sick banks in times of crisis. And crisis is one reason why the United States finally returned to authorizing a central bank a century ago. 

(America had previously had a central bank in the 19th century, but its legislative re-authorization was vetoed by Andrew Jackson who railed against a central bank as the tool of moneyed interests.)

The Fed began with the goal of protecting the dollar. It was given the exclusive right to create money in 1913.

The Fed would “provide a means by which periodic panics which shake the American Republic, and do it enormous injury, would be stopped,” according to Robert Latham Owen, one of the authors of the original Federal Reserve Act.

Why was it given these powers?

After the Wall Street banking Panic of 1907 led numerous banks to fail, “there was a growing consensus among all Americans that a central banking authority was needed to ensure a healthy banking system and provide for an elastic currency,” according to the official Federal Reserve history.

But critics claim the Fed has made things worse. Subsequent problems were the result of Fed governors giving in to political pressure, providing elastic or “cheap money.” This is the controversial Fed policy of setting interest rates. If set too low, the rates will mislead consumers and businesses, causing them to borrow too much. And that can lead to a cycle of boom and bust.

That’s what many believe happened in 2007-2008 as millions of Americans were encouraged through cheap-money policies to use subprime loans to buy homes they couldn’t afford. But Fed critics contend that it had happened before.

For instance, interest rates were dirt cheap in 1972, which led later to an economic disaster as inflation jumped to 10 percent and interest rates went to over 20 percent in the 1970s.

“The consequence of the monetary framework of the 1970s was two bouts of double-digit inflation,” said Fed Chairman Bernard Bernanke in a recent speech entitled, “A Century of U.S. Central Banking: Goals, Framework, Accountability.” These 1970s events killed interest sensitive industries and destroyed many small businesses that couldn’t obtain credit.

These controversial money policies have lead to crashes, depressions, and recessions, including the crash of 1929 and resulting Great Depression, critics say. Some 10,000 banks failed between 1930 and 1933, according to Fed numbers.
$10.00 $7.00

“Tragically, the Fed failed to meet the mandate to maintain financial stability,” Bernanke said in his speech.

“Many people,” according to the official Fed history, “blamed the Fed for failing to stem speculative lending that led to the crash, and some argued that inadequate understanding of monetary economics kept the Fed from pursuing polices that could have lessened the depth of the Depression.”

One of the people blaming the Fed was economist and monetary historian Milton Friedman. He criticized Fed policies for triggering the 1929 crash and then causing a depression that lasted over a decade. READ MORE à