The US Federal Reserve central bank does the OPPOSITE of fundamental central-banking principles.
A central bank should:
- Remove the punchbowl before the party gets started (tighten monetary policy before inflation/bubbles start). Instead, both Greenspan and Bernanke spiked the punchbowl with whiskey, cocaine, and LSD, kept everyone’s glasses overflowing, and injected any flagging raver with amphetamines to keep the party going at the cost of long-term health. Greenspan and other Fed apologists repudiate this basic tenet of good central banking when they argue that they cannot foresee and cannot prevent bubbles.
- Raise interest rates during a credit crunch to protect the currency. Instead, the Fed LOWERED interest rates to UNDERMINE the currency (US dollar). The 2007-2008 credit-DEMAND crunch (savings/solvency crunch) is about pricing and transparency (solvency) and the market will clear at a HIGHER interest rate, which is exactly what the effective funds rate began to do in August 2007 before the Fed intentionally SHORT-CIRCUITED the free-market solution and crashed the dollar, repudiating Baghot’s classic solution and basic tenet of good central banking.
- Lend freely at HIGH interest rates for GOOD collateral. Instead, the Fed is doing the OPPOSITE of both criteria by lending freely at LOW interest rates for BAD collateral: (1) setting the target Fed funds rate and lending to banks at NEGATIVE real interest rates and (2) taking BAD (“toxic”) collateral such as questionable Mortgage-Backed Securities (MBS). The Fed created new “facilities” precisely to take the toxic collateral that other banks would not accept as collateral in the open market. The Fed is taking bad collateral and in exchange is handing out “good” collateral (Treasuries, which other banks will accept in the open market . . . for now).
- Protect price stability. Instead, the Fed practices intentional price INstability with planned price "inflation" and planned currency depreciation. Expanding the money supply in perfect relation to the economy would yield 0% real price growth (if productivity increases, individual product prices should DECREASE while the money supply matches the new total of all production--the legendary "get more for less"). A 2% price-growth target rate is PLANNED INSTABILITY that intentionally destroys half your purchasing power every 36th year (by the "Rule of 72")—even if everything goes according to plan. The fact that today’s dollar is worth less than a 1913 nickel proves that the Fed failed disastrously at price stability.
- Reduce risk. Instead, Fed intervention is one of the greatest sources of risk in the markets. The Fed CREATES financial instability. The Fed’s very existence creates political risk as markets waste productive resources in the Kremlinology of Fed-watching. The Fed INCREASES risk during crisis because, rather than mitigating the higher than normal risk of a crisis, it ADDS risk by engaging in unpredictable behavior (emergency cuts between scheduled FOMC meetings, arbitrary bailouts for some companies and not others, sudden use of arcane powers not used in generations such as lending to non-banks, novel experiments of dubious legality).
- Increase transparency. Instead, the Fed actively thwarts transparency and increases opacity. A basic tenet of rational-actor economics and even Fed recommendations for the economy is transparency--yet the Fed does the opposite with its own operations and books, and Fed opacity further increases risk and instability. Presidential candidate Ron Paul noted that conducting Congressional oversight of the Fed is even more difficult than conducting oversight of some secret intelligence agencies. President George W. Bush blocked the International Monetary Fund’s (IMF) Financial Sector Assessment Program (FSAP) audit of the Fed to guarantee that the IMF FSAP audit results would not appear until after he left office (due 2010). When the 2007-2008 solvency crisis looms and the need for transparency is even more urgent than usual, the Fed again REDUCES and OBSTRUCTS transparency and price discovery by its new mortgage-laundering operations (TAF, TSLF, PDCF, etc.) so insolvent firms can bury the bodies in the Fed’s garden. When the markets vitally need to know the mark-to-market values of the MBS, the Fed strikes with surgical precision to PREVENT the precise solution needed. The Fed is to transparency as lead is to X-rays. (UPDATE: As if on cue to mock the American public by screaming accounting chicanery, the Fed hires ex-Enron lobbyist Linda Robertson for its Congressional liaison and, by extension, public-relations image.)
The Fed’s repudiation and violation of basic best practices for central banking and economics mark the Fed as a failure even by the standards of central banking, and mark the Fed as one of the greatest dangers to a healthy economy.
Inflation creates profit opportunities for a favored few speculators in churning and pump-and-dump schemes that put average people on the hamster wheel of trying to earn X% just to break even after inflation, fees, commissions, market risk, political risk, and taxes. However, the average Joe and Jane’s financial and political independence requires stable money, as defined by stable prices of 0% change over the business cycle. An American should be able to stick his/her nest egg under his/her mattress (the assets insured by homeowner’s insurance if desired, no FDIC needed), and a $100 bill should be worth a $100 even 50 years later. That system would avoid the information asymmetry, risk, moral hazard, malinvestment, and wealth destruction of unnecessary middlemen and would achieve predictable stability for long-term planning in the rational-actor school of economics.
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