Money $marts: Killing us softly with his song

GERRY KRAMER

When it comes to the economy, the Federal Reserve (the Fed) is the most powerful government institution in the America. It answers to no one, not the president, not the Congress.

It wasn’t designed to be that way. When the Fed came into being in 1913, it had limited power and the financial world had a different structure: money — the dollar and all other currencies — was backed by gold. Indeed, gold still circulated as a means of payment along with paper money. The gold link acted as a constraint on governments everywhere, limiting their ability to freely print money.

Over time, however, politicians (e.g. FDR and Nixon) wanting more “flexibility” in managing the economy were able to legislatively abolish the gold link. In addition, more and more economic management responsibility was delegated to the Fed. Today, nothing stands between the Fed and its monetary shenanigans. And therein lays the source of economic instability.

The Full Employment Act of 1974 gave the Fed specific responsibility for managing two variables, inflation and employment. Unfortunately, monetary policies implemented to stimulate economic growth and maximize employment can also fuel inflation. Thus if the stimulation fails, the economy can experience the worst of both variables: high unemployment accompanied by high inflation, known as stagflation.

At the end of the 70s, for example, after the Fed’s expansionist monetary policies, inflation was running at 14 percent per annum while economic growth was minimal. To get the economy back on track, the Fed reversed its policies creating another down-up roller coaster ride for the economy.

It’s not the mutual exclusivity of the inflation and employment variables that’s the Fed’s problem. Rather, it is the absurd belief that a handful of chosen economic “wizards” can through the manipulation of money manage a dynamic economy comprised of 310 million citizens without doing harm. Time after time this is exactly what has happened. Yet we continue to give the wizards a pass when they cause damage and hail them as saviors when they rescue us from the very damage they caused.

When the housing bubble blew up in 2008, Ben Bernanke, Fed chairman, was widely credited with saving the economy from ruin by supplying trillions of dollars in liquidity. “He saved us from economic catastrophe,” say the TV pundits and politicians. But the bubble could not have existed without the Fed’s prolonged low interest rate policies in 2001-2003, aimed at stimulating the economy.

Artificially low interest rates supported by increased money supply always result in the misallocation of resources. Cost looks cheaper than they are. Low rate mortgages (zero) encourage home purchases by those that cannot afford them. Demand for homes rises. The building industry responds by building more. The cycle continues until the bubble blows up.

Recovery from the recession has slowed and unemployment remains high. Fiscal policy is in lockdown. So once again, Bernanke is to be the savior even though the Fed’s current policy of low interest rates creates more distortions as well as harms savers and those on fixed income. We listen to his tune as he is killing us softly with his song.

- - -

Write to Gerryk3001@yahoo.com.

© 2011 marconews.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

  • Discuss
  • Print

Comments » 0

Be the first to post a comment!

Share your thoughts

Comments are the sole responsibility of the person posting them. You agree not to post comments that are off topic, defamatory, obscene, abusive, threatening or an invasion of privacy. Violators may be banned. Click here for our full user agreement.

Comments can be shared on Facebook and Yahoo!. Add both options by connecting your profiles.

Features