The recent release of the Federal Reserve Board’s
transcripts of its deliberations back in 2007 shows that their
economic prophecies were way off. How much faith should we put in
their prophecies today — or the policies based on those
prophecies?
Even after the housing market began its collapse in 2006,
Federal Reserve Chairman Ben Bernanke said in 2007, “The impact on
the broader economy and financial markets of the problems in the
subprime market seems likely to be contained.”
It turned out that financial disasters in the housing
market were not “contained,” but spread out to affect the whole
American economy and economies overseas. Then Chairman Bernanke
said: “It is an interesting question why what looks like $100
billion or so of credit losses in the subprime market has been
reflected in multiple trillions of dollars of losses in paper
wealth.”
What is an even more interesting question is why we should
put such faith and such power in the hands of a man and an
institution that have been so wrong before.
This is not just a question of a bad guess by Ben
Bernanke. The previous chairman of the Federal Reserve System, Alan
Greenspan, likewise misjudged the consequences of the housing boom
and bust. Nor was the Federal Reserve’s staff any more accurate in
its prophecies. According to the New York Times, “The
Fed’s own staff still forecast that the economy would avoid a
recession.”
Today, the economy has not yet fully recovered from the
recession that the Federal Reserve System’s staff and chairmen
thought we would avoid.
We all make mistakes. But we don’t all have the enormous
and growing power of the Federal Reserve System — or the seemingly
boundless confidence that Fed Chairman Ben Bernanke still shows as
he intervenes in the economy on a massive scale.
Not only does the Federal Reserve System control the money
supply and regulate banks, the Fed’s willingness to keep buying
hundreds of billions of dollars’ worth of government bonds makes it
easier for the Obama administration to keep engaging in massive
deficit spending that runs up a record-breaking national
debt.
The reason that the Federal Reserve can afford to continue
buying huge amounts of government bonds is that the Fed is
authorized to create its own money out of thin air. They use the
fancy term “quantitative easing,” instead of saying in plain
English that they are essentially just printing more
money.
Being wrong is nothing new for the Federal Reserve System.
Since this year is the one hundredth anniversary of the Fed’s
founding, it may be worth looking back at its history.
President Woodrow Wilson explained the reasons for
creating the Federal Reserve System. He said that the Federal
Reserve “provides a currency which expands as it is needed and
contracts when it is not needed” and that “the power to direct this
system of credits is put into the hands of a public board of
disinterested officers of the Government itself” to avoid control
by private bankers or other special interests.
The Federal Reserve was supposed to prevent shocks to the
economy that can come from drastic inflation or deflation, and
reduce the dangers that can come from widespread bank failures.
These are all good goals. But what is the Fed’s track
record?
In the hundred years before there was a Federal Reserve
System, inflation was less than half of what it became in the
hundred years after the Fed was founded. The biggest deflation in
the history of the country came after the Fed was founded, and that
deflation contributed to the Great Depression of the 1930s. As for
bank failures, they reached levels unheard of before there was a
Federal Reserve System.
Like so many “progressives,” then and now, Woodrow Wilson
seemed to think that, if those who made government decisions had no
financial interest in those decisions, then they could be trusted
to wield their powers in the public interest.
But the enormous power wielded by the unelected leaders of
the Fed over the economy, unchecked by the constraints of the
market, has repeatedly turned out to be more than human beings can
handle.
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