How Well Has The Federal Reserve Performed for America?
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How well has the Federal Reserve performed for America? Mainstream pundits, of course, say that Bernanke has saved the world . . . . but they said the same thing about Greenspan. So let’s look at the actual historical record to determine how well the Fed has done.
Initially, Milton Friedman and Ben Bernanke have both said that the Federal Reserve caused (or at least failed to cure) the Great Depression through its poor monetary policy.
Many also blame the Fed for blowing an unsustainable bubble between 2001-2007 through artificially low interest rates. If this sounds too much like an Austrian economics perspective, that may be true. But remember that Hayek won the Nobel prize in 1974 partly for arguing that artificially low interest rates lead to the misallocation of capital and to bubbles, which in turn lead to busts.
Moreover, one of the Fed’s main justification has been that it can provide a “counter-cyclical” balance. In other words, during boom times it can put on the brakes (“take the punch bowl away right as the party gets started”), and during busts it can get things moving again. But as economist Jane D’Arista has shown, the Fed has failed miserably at that task:
Jane D’Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit [has a] devastating critique of the central bank. The Federal Reserve, she explains, has failed in its most essential function: to serve as the balance wheel that keeps economic cycles from going too far. It is supposed to be a moderating force in American capitalism on the upside and on the downside, the role popularly described as “leaning against the wind.” By applying its leverage on the available supply of credit, the Fed can slow down a boom that is dangerously overwrought or, likewise, stimulate the economy if it is sinking into recession. The Fed’s job, a former chairman once joked, is “to take away the punch bowl just when the party gets going.” Economists know this function as “counter-cyclical policy.”
The Fed not only lost control, D’Arista asserts, but its policy actions have unintentionally become “pro-cyclical”–encouraging financial excesses instead of countering the extremes. “The pattern that has developed over the last two decades,” she wrote in 2008, “suggests that relying on changes in interest rates as the primary tool of monetary policy can set off pro-cyclical foreign capital flows that tend to reverse the intended result of the action taken. As a result, monetary policy can no longer reliably perform its counter-cyclical function–its raison d’être–and its attempts to do so may exacerbate instability.”…
The Fed is also supposed to act as a regulator for banks and their affiliates, but failed miserably in that role as well.
Indeed, the central bankers’ central banker – BIS – has itself slammed the Fed:
In a pointed attack on the US Federal Reserve, [BIS and its chief economist William White] said central banks would not find it easy to “clean up” once property bubbles have burst…
Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”
“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” [White] said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
As PhD economist Steve Keen has pointed out, the Fed (along with Treasury) has also given money to the wrong people to kick-start the economy.
Remember also that Greenspan acted as one of the main supporters of derivatives (including credit default swaps) between the late 1990′s and the present (and see this).
Greenspan was also one of the main cheerleaders for subprime loans (and see this).
The above list is only partial. And it ignores:
(1) allegations that the Fed has manipulated the markets; and
(2) claims that the Federal Reserve System saddles the U.S. government and American people with trillions of dollars in unnecessary debt (that would not be incurred if the government took back the “power to coin money” granted to the government itself in the Constitution).
Even so, it shows that the Federal Reserve has performed very poorly indeed.
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September 29th, 2009 at 8:54 am
Nassim Taleb on Ben Bernanke
‘We still have the same disease’
http://www.theglobeandmail.com/report-on-business/crash-and-recovery/we-still-have-the-same-disease/article1286246/
Ben Bernanke saved nothing! He shouldn’t be allowed in Washington. He’s like a doctor who misses the metastatic tumour and says the patient is doing very well.
September 29th, 2009 at 9:18 am
“…“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.” from William White, above, BIS Chief Economist
While this Man, in this instance, is a lone example, it should give pause to those, apologists, so quick to conclude that ~”it happened b/c they were Incompetent”..
We’ll get, much, closer to the correct Answer by crossing “Incompetence”, “Stupidity”, and “Woocoodanode?” off the List of potential contenders– they are, total, non-starters..
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and, while we dally, trying not to answer simple questions, on other fronts:
“When word first arrived that the G-20 would be meeting in Pittsburgh Pennsylvania, activists began organizing protest demonstrations. Events like this are what freedom of speech is made for. What better occasion to protest than a meeting of the world’s 20 top leaders — most of them deservedly hated — where they will be imposing policy on billions of people worldwide?
The majority of protesters consisted of labor and community groups; they encountered an army of police…literally. The New York Times paints an intimidating picture:
“…the police were out in force, patrolling on bicycles, foot and horseback, by river and by air … protesters trying to march toward the convention center…encountered roaming squads of police officers carrying plastic shields and batons. The police fired a sound cannon (a new weapon) that emitted shrill beeps … then threw tear gas canisters that released clouds of white smoke and stun grenades that exploded with sharp flashes of light.” Rubber bullets were used in a separate incident.
“Riot fences lined the sidewalks. Police helicopters, gunboats and Humvees darted to and fro. City officials announced they had up to 1,000 jail cells ready after county officials freed up additional space last week by releasing 300 people who had been arrested on minor probation violations.” (September 25, 2009). …
http://www.globalresearch.ca/index.php?context=va&aid=15423
September 29th, 2009 at 9:26 am
Pardon me? Did someone just say there was an elephant standing in the room?
September 29th, 2009 at 11:10 am
Hayek had it correct. The only thing to realize it that the misallocation of capital benefited the constituents of the Fed namely the banksters. The compensation schemes were meant to fully leverage the corresponding bubble.
September 29th, 2009 at 1:12 pm
“Allegations” that the FED has manipulated the markets? Ever hear of cause and effect? Just about every action they take manipulates the markets, the country and the taxpayers. And those actions are just the ones that we are aware of.
September 29th, 2009 at 3:38 pm
Speaking of elephants in the room: http://www.youtube.com/watch?v=RYA0DsPcbaU [Parental Warning]
September 30th, 2009 at 8:16 am
[...] well has the Federal Reserve performed for America? “Failed miserably” would be a good summation (except of course for the elites who got even [...]
September 30th, 2009 at 8:34 am
MEH posts “a sound cannon (a new weapon) that emitted shrill beeps” .. saw that there .. not knowing which model was mouted on the truck, but a version of that device can fry you like a hampster in a microwave (probably with a flip of a switch that day)(I wonder if the manufacturer or gov spec requires a double key like in War Games / 2nd in Washington)
having said that .. I wonder if in this day and age with the power of words over minds via the internet and tv/computer .. that on the spot demonstrations are all that important anymore … maybe even anti-productive .. because you can’t help but pump the economy of the very system (in this case) you are attemping to produce change on .. also you drain your own pocket in the attempt .. and the first paragraph comes back .. maybe harm yourself and your crew more than financially
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on the exact topic … I think our problem is the stock market has allowed to much shadow economy stuff to come into existance .. corporate stock is a money printing machine .. focus on sensible ways of curtailling that …. the idea of taxing each and every transaction would fund enforcement (but can transactions be tracked anymore .. really tracked)
September 30th, 2009 at 9:16 am
channel surfin .. FX has a scene from some movie .. of 2 American made choppers taking off in a tropical forest with the indigenous tribe (negro) looking frustrated/troubled and up-stream AMC has “Patton” … having just been to TBP & that cartoon yesterday “somethings wrong on the Web today .. I don’t know what is is”
MEH – is resistance futile today? seems you gotta go after the minds and the money ….