I used to rant about monetary policy frequently on this blog. I’ve tried to stop doing that. But it just blows my mind that while so much energy and angst in spent in this country on every little detail of politics, like how much the President spends on vacation or the latest gossip about Sarah Palin, almost nothing is said about the extraordinary and unprecedented actions of Ben Bernanke and the Federal Reserve.
We’ve seemingly forgotten that the the principal reason for our current financial disaster is the fact that the Fed artificially cheapened credit by holding overnight interest rates at less than 2% from late 2001 to 2004. By manipulating the free market the Fed was able to juice borrowing and speculation, creating a towering economic house of cards that collapsed, just as the few right-thinking observers predicted it would.
But rather than learn from the mistake, the Fed (with the complicity of both parties, the executive branch and the legislative branch) has chosen to repeat it, this time on steroids. Since late 2008 the Fed has kept the overnight interest rates at essentially zero. Interest rates are now being artificially maintained at the lowest rates ever. Meanwhile the Fed is flooding the economy with phony money. The Fed has dumped trillions of dollars of newly-printed money into the economy since late 2008, ballooning its balance sheet in a mind-boggling fashion.
Originally the Fed’s actions were to bail out and prop up financial institutions which made poor loans, transfering the risk of those loans from the institutions which profited from them, to the public. While that was immoral, outside the legitimate mandate of the Fed and likely fatal to the currency, more recently the Fed has been blatantly monetizing the Federal debt, by buying Treasuries at auction. It simply creates out of thin air the “money” it uses to buy the bonds, permitting the federal government to spend money it doesn’t have without the trouble of having to worry about finding a true lender. And of course an intended collateral effect of this policy is to drive interest rates lower.
As if all of this wasn’t bad enough (and I can’t find words to express how bad it is), now the Fed has unveiled “Operation Twist,” the latest outrage. With this “operation” the Fed has gone on a massive buying spree of long-term debt, driving long-term interest rates to absurdly low levels.
Now in a country addicted to borrowing and debt, low interest rates courtesy of the Federal reseve might seem to be a good thing. But the economic reality is that artificial manipulation of credit and debt creates malinvestment and asset bubbles. Healthy sustainable investment comes from savings of real wealth actually accumulated by the investors, not from debt and phony money. And incenting the public to borrow and speculate only sets people up for the kind of economic disaster we’re living through now. Further, rarely do folks stop and consider the effect of these policies on people who haven’t buried themselves in debt, but who instead have prudently saved money, as almost all Americans used to do.
The interest rate on CDs and savings accounts is now virtually zero. People who have retired on fixed incomes are having their savings stolen from them by the Fed to finance more borrowing and speculation. The only way they can hope to get a decent rate of return on their savings is to dive into the stock market (just as the Fed policy makers intend them to do), where they face the very real risk of losing their life savings.
It doesn’t end there. Propping up a bloated stock market, maintaining a bubble in the real estate market, and incenting insane borrowing and speculation, all at the expense of the prudent and the next generation is, of course, immoral enough. But dumping all this new “money” into the system also devalues the currency and creates monetary and price inflation, causing the cost of commodities and necessary goods to skyrocket. Thus, while Grandma is earning virtually nothing on her savings, her cost of fuel, food and health care continue to increase dramatically.
I see this all as a rape of responsible America by the irresponsible. It leads inevitably to a collapse of the currency and the irreversible ruin of our economy.
It is immoral.
This post only scratches the surface of the many reasons why it is way past time to end the Fed.