The President of the United States is typically viewed as the most powerful person on the planet. Surprisingly, the Chair of the Federal Reserve is typically viewed by many as the second most powerful.
Indeed, I would make the case that the Fed Chair, through his or her influence upon short-term interest rates (which leads to economic stimulus or economic restraint), current inflation pressures, and expectations of future inflation (which greatly influences the level of long-term interest rates), has perhaps more influence on our day-to-day lives than does the President.
The Fed has an ability you and I do not …the ability to create money. With this power comes enormous pressure from the bond market to do it responsibly so as to keep inflation pressures under control.
The Fed enjoys a reasonable level of “independence” to make difficult choices when necessary—such as pushing short-term interest rates higher to control inflation, usually resulting in a slowing economy and rising unemployment. This independence is vital to the Fed’s inflation-containment credibility.
Three major issues involve the Fed in coming months…
1) One of the most important decisions to be made by President Obama in coming weeks is whether to reappoint Federal Reserve Chair Ben Bernanke to another four-year term. Bernanke’s current four-year term ends in January 2010. In my view, the President would make a wise choice in reappointing Bernanke, a view shared by more than 90% of forecasting economists in a recent survey.
What we don’t need is greater uncertainty about monetary policy. Were Obama to propose someone seen as an Administration “puppet” in regard to impending monetary policy, similar to President Carter’s disastrous appointment of G. William Miller as Fed Chair in 1978 (which led the U.S. dollar sharply lower and long-term interest rates sharply higher, tied to loss of credibility), the results could rival those of three decades ago.
The Fed, along with the U.S. Treasury, has taken unprecedented steps during the past two years to avoid the potential of an even greater domestic and global economic calamity than currently exits. As some suggest, the “Depression” option is no longer in the cards.
The Chairman has drawn frequent criticism for some of the steps taken, including the “bailouts” of Bear Stearns and AIG. In hindsight, some of that criticism may be warranted. However, the financial system was on the brink of collapse last fall. Aggressive steps were required and delivered
2) The second major issue is the desire of many in the Congress to bring the Fed under greater Congressional control. One effort, led by frequent Presidential candidate Rep. Ron Paul, seeks a regular audit of the Fed’s conduct of monetary policy. Paul seeks the elimination of the Fed itself. Given the Congress’s highly political bias, and inability to keep wasteful spending under control, one simply cringes in fear at the prospect of the Congress having a greater say in the conduct of monetary policy
3) The third major issue is how and when the Fed will implement its “exit strategy” from recent extraordinary monetary stimulus. The Fed is widely expected by forecasting economists to begin pushing its key short-term interest rate higher within 6-9 months from today’s historic low. Various moves to reverse other forms of unprecedented stimulus, known as “quantitative easing,” will likely begin by the end of this year.
Jeff Thredgold is an economic consultant to Zions Bank
Featured in the 29 July 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.
*Artwork from franckie under Creative Commons license at Flickr.com.
I firmly believe the Fed should be audited, Most people don’t even know who is part of this private banking system. The Fed certainly messed up during the housing boom by lowering interest rates just in time to catch all the buyers with ARMs when they relentlessly once again raised rates.
Certainly it was not the Fed but Congress who enabled all those bad loans and lower standards of borrowing, but they certainly lacked a feel for what was going on. The Fed has too much power and it’s whole operation is a mystery shouded in secrecy. Then again your position on the Fed should come as no surprise.
Alt-A and Option ARM Mortgage (negative amortization mortgages) foreclosures are poised to slam the U.S. financial system in 2011. Insurance companies will be racked by this as well an many pension funds which are already underfunded. This, I believe, is the most crucial economic issue facing the administration. Few news groups are covering this looming crisis.
Nice article with some thoughts to think about. My concern is on the future and what may be in store for us.
I agree that the Federal Reserve chairman has a lot of power. However, Alan Greenspan was probably the most reckless chairman in the history of the Federal Reserve by fighting every recession and financial crises with too low of interest rates and excess liquidity. Sometimes it might be best to allow a recession work off the excess without building a moral hazard of too big to fail.
Like you mentioned in the article the Federal Reserve has the ability to modulate the economy through the short term interest rate. Here’s the catch-22. It seems that they can never get the interest rates back up to the previous high before the economy slows again. The problem is that the whole interest rate structure is sinking towards 0% interest rate from which no stimulus ability can take place. This trend has been in place since the peak in interest rates back in 1981. The U.S. best case scenario now is that we follow the path of Japan for decades.
“The Fed has an ability you and I do not …the ability to create money”
Yes there is a lot of secrecy about the Federal Reserve. This country and its leaders fought central banking for decades until they caved in 1913. A good read is the book “The Creature from Jekyll Island” by G. Edward Griffin. As right or wrong as it might be, it’s what we have and so we must live with it. What’s going to happen with this economy will happen regardless of thinking that economic depressions are not an option.
Personally, the credibility of the Federal Reserve is at stake. Think about it. If the Federal Reserve has so much ability to modulate the economy, how did we get to the point we are at now? The point is they don’t or they are losing control. The main tool they have is the short term interest rates…..lately that doesn’t work and so they have to resort to unconventional means (quantitative easing).
What are they going to do for the next financial downturn?
I’m afraid we aren’t going to be able to grow our way out of it either as real wealth generating capability of this country has been replaced by lower paying service economy jobs. What filled the void were these asset bubbles where people thought they were getting wealthy for doing nothing……..it was all an illusion. You can’t hollow out the manufacturing capability and replace it with financial engineered economy of products such as subprime mortgages, MBS, derivatives, CDO’s, financial toxic waste etc.
Thus, I put a good share of the blame for the FINANCIAL CRISES, squarely on the banking and financial sector of this country and not so much on the gullible public which participated with these schemes. The middle class and poor are going to take the brunt of the pain though, through a standard of living decline in the years ahead.
What sickens me is where I think we’re headed in this country and that is another serious economic depression. The “bailout bubble” when or if it implodes could very well be the end of the Federal Reserve and our money system if they are not careful.
The Federal Reserve should absolutely be audited. This does nothing more than allow Americans to see what is being done with their money. In any branch of government there can be abuse and the people must ALWAYS be aware of it. The secretive Federal Reserve is the enabler of the booms and busts. The credit and monetary expansion have destroyed most of the value of the dollar and turned America into a debt saturated, savings devoid, war and welfare machine run by the international banking industry. The Federal Reserve is not a protector of the people, it is the top of a pyramid scheme that needs to lean on the fragile FDIC just to survive while fueling the growth of every statist and socialist agenda in the US and some abroad. When you want stability, you decentralize to minimize the damage of mistakes and mazimize efficiency, central planners are not mentally capable of having the knowledge of every facet of the banking structure so they must fail increasingly as they gain more power. The simple fact is that our current hijacked monetary system is designed to transfer the value of money upward to those who use the new money first, it ensures that the people will do the work and the well connected and powerful will reap the rewards. The founders warned us of this, they required commodity backed money, they put control of the money in the hands of the people, but ultimately even prohibited them from increasing the money supply with fiat.
“Inflationism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism and peace, so is inflationism part and parcel of imperialism, militarism, protectionism, statism and socialism.”
“Economic nationalism, the necessary complement of domestic interventionism, hurts the interests of foreign peoples and thus creates international conflict. It suggests the idea of amending this unsatisfactory state of affairs by war.”
“Keynes did not add any new idea to the body of inflationist fallacies, a thousand times refuted by economists… He merely knew how to cloak the plea for inflation and credit expansion in the sophisticated terminology of mathematical economics.”- Mises
I was a little surprised by the 3 comments posted above mine. I would have thought people that have affiliations with a bank/banking industry would be a little better informed on such fairly basic matters.
First, if you want to find out who is on the FRB board just go look at this web page http://www.federalreserve.gov/aboutthefed/default.htm. Or if you are looking for the FDIC board go here http://www.fdic.gov/about/learn/board/index.html. It isn’t exactly hidden or secret.
The FDIC is fairly secretive about some of its policies, especially regarding what banks are failing or might fail, but if that information were made public those banks would fail, as no investor or bank would give it capital/loan, and all its depositors would go and remove their deposits.
Second, the question of auditing of the FRB and/or the FDIC, I do not think it is fair to assume the writer of the article is against auditing or more oversight of either government entity, I believe he was pointing out the cost of what can happen if the oversight was put into the wrong hands. I mean do you really think congress can set monetary policy in any kind of reasonable fashion? They can barely agree that our health care system is broken and needs to be fixed, and even the ones that do agree with that can’t even come anywhere close to agreeing on why its broken and what it will take to fix it. Let alone to actually do anything about it in a timely fashion.
Just look at how congress has handle this entire economic situation, they just threw trillions of dollars at the problem (a lot of the ‘stimulus’ money hasn’t even filtered down into local economies yet) which has had significantly less effect then even some of the more pessimistic outlooks were predicting. Now that we are sort of out of the problem, where are all the new rules and regulations to make sure something of this scale cannot happen again?
Also it was said that the IRS does not effect how you conduct yourself other then doing by keeping you from doing anything illegal with your money. In actuality the IRS doesn’t care if you make/use your money illegally they just want you to pay taxes on it (ask any circa 50s mob boss about that). You are correct in saying that the IRS version of auditing doesn’t effect how you spend your money, but not all auditing is like what the IRS does. As stated the IRS only cares how you made/spent your money in the past, where as audits that banks are required to go through or for that matter most corporations go through, do affect their spending. Since that type of auditing is there specifically to restrict where, how, and on what banks/corporations have/will spend their money, your argument is not stated correctly, nor is your example correct. If the auditing on the FRB/FDIC is done correctly (which if left in the hands of congress I doubt it will) it would be a good thing. However, both the FRB/FDIC is already audited writ large. The decisions they make are analyzed by every new media, economic advisor, university economics department, etc.; and it is pretty quickly realized when they screw up and/or actually get things right. FRB chief Alan Greenspan is/was hailed for how well he was able to set policies that let our economy expand at such a fast pace with little worry about inflation, however we are now feeling what happens when an economy is expanded based almost solely on credit growth.
As far as regulation, the GAO and congress does have over-site over both the FRB and the FDIC so if they actually were doing anything illegal or damaging they can take measures to stop it, but the FRB and the FDIC were both set up independent of congress and the president for a reason, and as part of that, also the reason why board members can only serve a 4 year term before having to be reappointed.
Third, are the arguments regarding ARMs and the FRB’s role in creating the mess. Even if it was the FRB’s job to regulate the loan market (which its not) or to base its consideration of whether or not to raise/lower the base rates on loans (which it doesn’t and really shouldn’t/can’t), it would still NOT be responsible for this mess. Any consumer who signed an ARM (and yes I do agree that a lot of loan officers pushed them knowing they were bad deals for the consumer, but lets at least have some personal responsibility) should have know better. Most ARMs were only loosely based on the base rate; a lot of ARMs actually would have still adjusted upward even if the rate had stayed the same or even lower. ARMs were/are just like credit card offers that give you a 0% interest rate for the 1st 6 months but then after that 6th month period the interest adjusts up to 9%.
Even if the Fed did see what was coming because of the ARMs adjustment to the base rate they really couldn’t have lowered or left the base rate alone due to inflation and other economic considerations that go into the adjustment of the base rate. They currently can leave the rate as low as they have because inflation really hasn’t been a problem currently (actually we still are seeing some deflation of prices)
After all that I really think that point #3 from the original article is the most profound. The ‘exit strategy’ is what will prove whether or everything that has been done has really ‘fixed’ the crashing economy or not. This is actually probably the most critical time period for all this. If things like inflation, dollar value, and other monetary pressure are not kept in check, the recovery of our economy will not be measured in years it might be measured in decades. There currently has been little or no public talk as to what the ‘exit strategy’ might be, which is what I am mostly interested and what I think the discussions from here on should mostly entail (other then regulations over the financial markets, which really need to be laid down way more then health care does).
“That’s quite a leap! Ron Paul’s HR 1207 simply allows for an audit of the Fed by the Comptroller General of the United States.”
Well HR 1207 is not about getting of the FRB currently. However, it has been Ron Pauls long standing policitcal position that he wants to get rid of the the FRB and the FDIC. So, while yes HR 1207 isn’t aimed at getting rid of the FRB currently I believe the author was just pointing out Ron Pauls long standing veiw of the FRB/FDIC.
All I can say is wake up. We ARE in a depression, and its going to get much worse thanks to the federal reserve and the congress who dont have the guts to do the will of their constituents. Audit them to see their criminal activities, then abolish them!
The entire purpose of the federal reserve, just like the previous unconstitutional central banks, starting with Hamilton’s “Bank of the United States” is to enrich its owners through fraud, by inflating a fiat currency. Any other ostensible purpose of the fed is nothing but propaganda seeking to cover the criminal activities of this utterly corrupt institution.
Since its creation in 1913, the fed has diminished the value of the dollar by over 95%. That, my friends, is theft through counterfeiting.
The constitution authorizes the congress to coin money, and regulate the value thereof. It does not authorize the congress or any other part of the federal government to issue bills of credit, and explicitly prohibits the states from making anything other than gold or silver into legal tender.
Our founders had a very good reason for this: the country had just suffered the devastating effects of the hyperinflation of the continental dollar, and they were determined to prevent a repeat of that disaster.
Today, the criminals who run the fed have just inflated the currency by trillions of dollars over the few months since the Bush-Paulsen bailout of the wall street banks (another unconstitutional action, for what it’s worth), and it’s high time that the congress stopped shirking its duty, and shined some light into the machinations of this cartel. It is, literally, the least they can do.
-jcr
“frequent Presidential candidate Rep. Ron Paul”
I’m curious what exactly you’re trying to insinuate here. Dr. Paul has run for president twice, as the Libertarian candidate in 1988, and again in the last election cycle, where he was the only Republican with the integrity to uphold the Constitution as well as the Republican platform. On both occasions, he ran reluctantly, at the urging of his many admirers.
-jcr
The Fed’s job was to protect the value of our currency. Ever since they were founded in 1913 they have done a terrible job. The Fed, through it’s policies, lost 96% of the value of our dollar. Today it takes $25 dollars or so to purchase what a dollar used to buy, thanks to the Fed.
The Federal Reserve has done an absolutely horrible job during their tenure. Interestingly, the value of the dollar was stable for pretty much the entire 125 years prior to the existence of the Fed.
The Fed causes all of the booms and busts, because they are able to manipulate our financial system. They create money and manipulate interest rates. With those tools they are basically able to do whatever damage they want to our financial system.
Why in the world does our nation permit a such a secretive private bank to wield this sort of power in the land of the free? Yes, the federal reserve is private. US Courts have ruled to that effect. Even U.S. House of Representatives member Dennis Kucinich has stated many times that the Federal Reserve is no more federal than Federal Express.
This private bank does not deserve the right nor does it have the authority to continue keeping their secrets and hiding information from the elected representatives of The People. We must pass H.R. 1207 and audit the Federal Reserve. No more lies, no more secrets. It’s about time that The People get the truth. Audit the Federal Reserve.
What a load of pro-Fed hogwash!
The federal reserve is a private banking cartel with no accountability that operates in complete darkness with no accountability to congress or the American people.
This sort of practice can only lead to corruption and cronyism.
This is OUR money you are talking about. This is OUR debt they are enslaving us with.
Luckily, people like Jeff Thredgold are transparent. They are lapdogs of the Fed. They recognize the hand that feed them and are not interested in biting it.
You and I however need to look very, very hard at the antics and goings on of the federal reserve – which is not federal and has no reserve.
Replace the Fed with a computer whose algorithm is published and targeted to a 2% inflation rate.