The Federal Reserve released their plans for the short-term interest rate on Wednesday. Usually the Fed does not give such explicit plans, so their announcement was emblematic of the growing role the Fed plays in today’s society. The Fed’s main power is the control and creation of money, and it exercises this power while largely remaining immune from congressional oversight.
Despite its immense powers, the Fed has presided over an era of periodic recessions and persistent inflationary eras. Many corrupt business-government partnerships form because congressmen can vote Fed-financed stimulus funds to their business friends, who in return give generous contributions to future re-election campaigns.
A lot of cash is up for grabs. An example is the 2008 Troubled Asset Relief Program, when over $700 billion of taxpayer money was used to bail out insolvent banks. Ultimately, the Federal Reserve has far too much power for a non-democratically accountable institution with little oversight. A true solution to today’s economic problems is to end the monetary mischief by abolishing or severely restricting the power of the Fed to create money without commodity-backed collateral.
One of the intended purposes of the Federal Reserve was to diminish the boom and bust effects of the business cycle, a task the Fed has failed to accomplish. The National Bureau of Economic Research lists 18 recessions that have occurred in the 20th and 21st century.
In fact, the Fed worsens the business cycle by feeding into the boom period with overabundant credit. The 2008 housing market collapse was in part fueled by the Fed’s manipulation of the interest rate. The Fed cut the federal funds target rate from 6.5 percent in January 2001 down to 1 percent by June 2003.
This low level was maintained for a year before the rates were raised up to 5.25 percent in June 2006. This artificially low rate created a market bubble by stimulating investment beyond sustainable levels.
Low interest rates reduce the rate of return that many investors receive, often causing them to seek out riskier investments.
When the Fed raised the rate back to 5.25 percent in 2006, the bubble was burst, causing the ensuing housing market and financial sector to collapse.
By creating money, the Fed decreases the value of every dollar already in circulation. Money creation is thus a subtle tax that provides an easy route for politicians to finance pet projects and militarism. War bonds did not fund WWI and WWII, the Fed did.
Estimates are that “only 21 percent of the war [WWI] was funded through taxation. The remainder was funded by Fed-backed borrowing (56 percent) and outright money creation (23 percent), for a total cost of $33 billion.”
Certainly war and particularly self-defense are sometimes justified, but inflationary money creation does much to hide the cost from the public, encouraging unnecessary conflicts.
The Federal Reserve has failed to eliminate the boom and bust of the business cycle. Furthermore, it has destroyed the value of the dollar through inflation to finance war and political projects.
Reform of the Federal Reserve is a bipartisan issue that satisfies the Republican desire for small government as well as the Democratic desire for curbing crony capitalism. Reforming the Federal Reserve will lead to more responsible political choices, as well as a more robust and freer economy.
Kent is a junior majoring in chemistry.
