The View From 1776
Saturday, January 09, 2010
Why The Fed Performs So Poorly
The Federal Reserve focuses on the wrong targets, and we all suffer.
Clearly the Fed has failed completely, except during Paul Volcker’s tenure in the 1980s, in the historical role of central banks: maintaining a stable currency. Between October 2000 and April 2008, the dollar declined roughly 50% in purchasing power vs. the Euro.
Stability of the dollar wasn’t even on the radar screen. In Chairman Bernanke’s words, the “Federal Reserve’s mandated goals [are] maximum sustainable employment and price stability.”
That amounts to empowering the Fed to engineer the entire economy, to entrusting our lives and futures to the dubious wisdom of a small group of ivory-tower liberal-progressive intellectuals. This is quintessential socialism of the sort described by Henri de Saint-Simon, socialism’s first systematic theorist. It is the diametric opposite of a free-market economy of the kind that, from 1620 until 1933, made the United States the economic powerhouse of the world and produced the fastest increase in standard of living in world history.
In practice the Fed ignores soaring commodity prices and huge declines in the dollar’s exchange value against other major currencies, focusing instead upon so-called core inflation, a measure that excludes food and fuel costs.
Maintaining maximum sustainable employment means pouring inflationary amounts of fiat money into the economy to protect the wage and work-rules rigidity forced upon the rest of us by organized, socialistic labor unions (cf. the formerly Big Three automakers). Price stability means keeping prices such as those of computers and computer equipment at original high levels, rather than allowing the normal economic course, which is for all products to become cheaper as business competition forces production and design improvements.
Without a stable currency businessmen cannot plan for long-range investments that will raise productivity, which in turn is the source of lower prices, increased real income for workers, and a higher standard of living. The flip side of failing to maintain a stable currency is recent decades’ decline in real purchasing power of low-income to middle-class level workers’ incomes. The Fed is content with allowing 2% annual inflation, a compounding rate that will steal half of a worker’s dollar purchasing power in a typical working life of 35 years. Chariman Bernanke’s greatest fear is, not the great probability of inflation, but the bogeyman of deflation.
Under the continuous inflationary actions of the Fed (creation of fiat money to monetize Federal deficit spending), the very top-income-bracket people in the financial community have seen tremendous increases in income, because the Fed’s inflationary policies foment rampant speculation in the financial markets. Wall Street investment bankers and traders reap multi-million dollar bonuses only because the Fed keeps pouring monetary gasoline onto the speculative fires. The stock market jumped 20% last year, because so much speculative money was sitting on the sidelines seeking even risky investments to compensate for the historically low interest rates engineered by the Fed’s multi-trillion dollar creation out of thin air.
Read Judy Shelton’s dissection of the Fed’s destructive policies.