Sunday, September 27, 2009
How Well Has The Federal Reserve Performed for America?
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:
The Fed is also supposed to act as a regulator for banks and their affiliates, but failed miserably in that role as well.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."...
Indeed, the central bankers' central banker - BIS - has itself slammed the Fed:
The head of the World Bank also says: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.
Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the 'real economy' of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.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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I think you do the Fed and Greenspan a disservice.
ReplyDeleteTheir signal achievement in the last few years has been to bring forward the inevitable collapse of this unsuatainable system by at least 10 years.
Great piece. The Fed has failed miserably as a regulator(see today's Washington Post(http://www.washingtonpost.com/wp-dyn/content/article/2009/09/26/AR2009092602706.html?nav=rss_business&sid=ST2009092602937), and the low interest rate policies of the Fed encouraged a mis-allocation of capital. Since the Fed is not fully accountable to the American public the regulator aspect of the Fed should be stripped and given to the other existing agencies and Congressional oversight strengthened.
ReplyDeleteIt was interesting to hear Paul Volcker argue this week that the Fed was a natural regulator and to discuss frustration when easier monetary policy was undermined by stricter Fed regulatory policy some years back. I generally have high regard for Paul Volcker but since when is Regulatory police work part of monetary policy tool? To encourage lending?
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...
ReplyDelete"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.
That is an excellent summary. Unfortunately, the US government & the Fed have done all they can to try to forestall any reckoning by trying to prop up the big failed banks, failed auto companies, failed insurance companies, failed housing market, etc. in an effort to reinflate the bubbles & done so all with taxpayer money, with little outrage or even opposition.
they have merely compounded the problems by trying to push them down the road and increased the odds of total societal collapse envisioned by faber, sooner rather than later, imo.
rico laws are unconstitutional so is the federal reserve before we abolish both. why not charge the central bankers under rico laws. that way everything these criminal racketeers have made can be consfiscated from them and returned to the american people who they were stolen from.
ReplyDeletethen abolish them. simple fixes for complex problems.
It's also failed miserably in its responsibility to maintain price stability and maximum employment.
ReplyDeleteI don't believe the Fed lowering the intrest rate had as much to do with our current problem as is claimed. Housing wise it is clearly the mortgage brokeres , banks and investiment houses that changed the lending requirement from sane to insane. To go as low as a vehicle knows as a Liar Loan , no income, no credit, an unchecked credit rating , basically a sign here loan. With built in suicide clauses that they knew well in advance would cause foreclosures. Then to bundle these into bundels of putrid waste and get them rated as AAA (with a liitle payoff) to help the ratings company, they sold these things to the world. Hardly can be blamed on interest rates. Interest rates changed maybe a percent or two over the whole period.
ReplyDeleteNow the next biggest factor is that income has actual fallen over the last decade and the ability of a family of four is a city like Sacramento falls 10's of thousands short of making ends meet causes credit card debt to zoom to the point where they can't be paid.
On top of all that , banks who are now known crooks , raise rates, fees and other costs to the usury level. Please don't tell me 30% interest in not usury. Once again it can hardly be blamed on the Fed lowering interest rates. Hell the banks are paying next to 0 for the money they lend out at 30% . Not the Feds fault.
All our complex societal constructs are built upon a variety of all too human emotions. Among these are fear and trust, loathing and admiration.
ReplyDeleteThe -current and ongoing- destruction of many of our societal constructs -some might perceive of as an economic recession -or- depression, is better thought of as a destruction of facets and assets of our society. As -these- are dependent upon the emotions of individuals, -the literal sentiment individuals have for others and the society in which they live, -we perhaps can best judge how well the Fed has done, by measuring how individuals feel about other individuals, and the society in which we live.
Human memories are frail. So, our best estimates of these factors might be best measured -by how we -as individuals- feel today about the society we live in, and how we feel about the other individuals in our society -about whom we have become aware.
Over the short term, it should be clear, these individual impressions held of our society are -at- what appears to be a low ebb today.
It well might be, -due to the short and imperfect memories of human beings- that at some time in the future, individuals will feel better about other individuals and the society in which they live.
There is no guaranty, -historic or psychological- that this improvement in any individual human sentiment will happen.
The literal course of human affairs spread out over decades and centuries is much more difficult to assess, -but no less important to consider here.
This course clearly can affect how individuals feel about other individuals and about the society in which they live, -even regardless of the veracity of an individual's personal awareness or veritable cognizance of that course.
In this sense, and noting my own frail perception, my personal estimation of the job the Fed is doing is not favorable, -but- in this qualified sense.
The Fed has very ably made it possible for some individuals -and- our society as a whole -to head down a path, I cannot consider advantageous toward that end which might provide for any congenial course of human affairs to lead to in the sense of a generally more friendlier or more pleasant future.
I believe quite the contrary is true. I further believe -that this is likely the unconscious consensus of the majority of individuals in our society today.
This unconscious consensus has helped give rise to -and- tipped events toward the -current and ongoing- destruction of many of our societal constructs.
Not unlike a swarm of bees, society is -as if- spontaneously taking flight from the current societal paradigm, which almost certainly includes what it is that the Fed has been doing by its -not entirely dissimilar- mindless and meandering workmanship and leadership.
Oh, what a tangled web we weave, -all in an increasingly failed effort to make life better.
That is the BIG lie. That life can be made better.
WHAT is better than life? What? -fools. What?
Time to dust off the guillotines!
ReplyDeleteThe Fed has failed. On prices and employment. Full stop:
ReplyDeleteBut The Fed is nothing more than another fox guarding the chicken coop, a fox that is part of the skulk of foxes that has overseen the western economy for the last three hundred years.
From "The Great Reckoning" by eminent economists James Dale Davidson and William Rees-Mogg, Sidgwick & Jackson, published in 1993:
On average, every forty-six years, (plus the 9-year gap between market peak and market crash = fifty-five years) for the last three hundred years since the collapse of the South Sea Bubble in the second decade of the1700s, there have been five more commodity peaks in the world's stock markets, followed by a crash, followed by a depression (and the theft of another generation's wealth.)
I accept their observation that there has been a clockwork nine-year gap between commodity peaks and market crashes over the last five generations and a boom-bust cycle twice every hundred years or once a generation, meaning every generation of working and middle-class citizens, for the last three hundred years has been good and truly and thoroughly plucked through the mechanics of a depression.
I quote Davidson and Reese-Mogg:
· First Time: Commodity prices peaked in London in 1711 The South Sea Bubble burst exactly nine years later in 1720.
Depression followed.
· Second time: Producer prices peaked in London in 1763. The London stock market crashed again in 1772 (nine years later).
Depression followed.
· Third time: Commodity prices peaked in London in 1816.The London stock market crashed in 1825 (nine years later).
Depression followed.
· Fourth time: Wholesale prices peaked in New York in 1864. A worldwide assets crash began in May 1873 (nine years later).
Depression followed.
I paraphrase their comment from that point:
· Fifth time: Then followed our beloved Great Depression in the 30s, about which much has been said, from which, little learned.
· Sixth time: Commodity prices peaked some fifty years later in Tokyo, in 1980. The Tokyo stock market crashed in 1989 (again, nine years later). The depression following that crash is now upon us:
My interpretation of the Davidson, Reese-Mogg observation of these last six economic Tsunamis is that they were deliberate, organized, planned serial orchestrations of theft by the banking cartels:
Once is an accident, twice is a coincidence, but three times is a pattern and a Declaration of War.
Four times is the realization that the Declaration of War fell on the deaf ears of sleeping fools, five times is simple daylight rape and plunder of the same fools' children – the sixth time, this time, Grand Theft, Planet©, is perhaps, hopefully, a lesson finally learned, and do we wake up?
Remember also, that each depression was surrounded, before, during and after by war, including the ones today, which are the most expensive ever.
In the context of what I’ve sourced, 1980 plus 46 years means the next commodity peak should be around 2026 and the next crash exactly nine years later, in 2035.
If you’ve followed my reasoning, you can start planning for your children’s extremely wealthy retirement, because if the goldsmith banking system, including The Fed and the Bank of International Settlements (BIS) is not dismantled in favor of Sovereign or ‘Permanent’ currencies, the boom-bust business will continue as usual, but at least your kids may not be victims.
To see the performance of the FED one chart is worth a thousand words.
ReplyDeletehttp://www.mindcontagion.org//html/bcfig1.html
Grand Theft, Planet©. Priceless!
ReplyDeleteMorenci high school sucks and so do the feds. Our country will soon come to an end because of the clowns running it they are all jokes!
ReplyDelete