By George Washington of Washington’s Blog.
How well has the Federal Reserve performed for America? Mainstream pundits, of course, say that Bernanke has saved the world . . . . but they said the same thing about Greenspan. So let’s look at the actual historical record to determine how well the Fed has done.
Initially, Milton Friedman and Ben Bernanke have both said that the Federal Reserve caused (or at least failed to cure) the Great Depression through its poor monetary policy.
Many also blame the Fed for blowing an unsustainable bubble between 2001-2007 through artificially low interest rates. If this sounds too much like an Austrian economics perspective, that may be true. But remember that Hayek won the Nobel prize in 1974 partly for arguing that artificially low interest rates lead to the misallocation of capital and to bubbles, which in turn lead to busts.
Moreover, one of the Fed’s main justification has been that it can provide a “counter-cyclical” balance. In other words, during boom times it can put on the brakes (“take the punch bowl away right as the party gets started”), and during busts it can get things moving again. But as economist Jane D’Arista has shown, the Fed has failed miserably at that task:
Jane D’Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit [has a] devastating critique of the central bank. The Federal Reserve, she explains, has failed in its most essential function: to serve as the balance wheel that keeps economic cycles from going too far. It is supposed to be a moderating force in American capitalism on the upside and on the downside, the role popularly described as “leaning against the wind.” By applying its leverage on the available supply of credit, the Fed can slow down a boom that is dangerously overwrought or, likewise, stimulate the economy if it is sinking into recession. The Fed’s job, a former chairman once joked, is “to take away the punch bowl just when the party gets going.” Economists know this function as “counter-cyclical policy.”
The Fed not only lost control, D’Arista asserts, but its policy actions have unintentionally become “pro-cyclical”–encouraging financial excesses instead of countering the extremes. “The pattern that has developed over the last two decades,” she wrote in 2008, “suggests that relying on changes in interest rates as the primary tool of monetary policy can set off pro-cyclical foreign capital flows that tend to reverse the intended result of the action taken. As a result, monetary policy can no longer reliably perform its counter-cyclical function–its raison d’être–and its attempts to do so may exacerbate instability.”…
The Fed is also supposed to act as a regulator for banks and their affiliates, but failed miserably in that role as well.
Indeed, the central bankers’ central banker – BIS – has itself slammed the Fed:
In a pointed attack on the US Federal Reserve, [BIS and its chief economist William White] said central banks would not find it easy to “clean up” once property bubbles have burst…
Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”
“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” [White] said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
As PhD economist Steve Keen has pointed out, the Fed (along with Treasury) has also given money to the wrong people to kick-start the economy.
Remember also that Greenspan acted as one of the main supporters of derivatives (including credit default swaps) between the late 1990’s and the present (and see this).
Greenspan was also one of the main cheerleaders for subprime loans (and see this).
The above list is only partial. And it ignores:
(1) allegations that the Fed has manipulated the markets; and
(2) claims that the Federal Reserve System saddles the U.S. government and American people with trillions of dollars in unnecessary debt (that would not be incurred if the government took back the “power to coin money” granted to the government itself in the Constitution).
Even so, it shows that the Federal Reserve has performed very poorly indeed.
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I would add another item to the charge list: in-bred market operations.
(1) By buying long term treasuries in their domestic monetary policy operations (unlike, say, the ECB and the BoE), the Fed accidentally contributed to the low long term interest rates which they regarded as a conundrum. Though the Fed might have denied the effect of this policy on long-term interest rates at the time, their QE policy suggests that they now accepted it.
(2) By refusing to add to the US foreign currency reserves – which became as anomalously small as China’s are anomalously large – the Fed missed an opportunity to “lean into” the Chinese intervention against the dollar, to at least prevent the effective decline in the value of their currency reserves, and to acquire some protection against a sudden stop of capital inflows into the dollar.
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
I agree completely – and we can’t just blame our leaders – they weren’t imposed upon us by Martians. Everybody likes booms and most bitch long and hard should interest rates rise. The prevalent view is that interest rates should always be lowered – to stimulate the economy in a recession (or maybe more accurately, any growth considered “subpar”) – or to keep from curtailing the fragile expansion (and to many, expansions are always fragile). With incredible debt we now have, and the tremendous cost of servicing it, what politician, or segment of the population, is going to be pounding the table for interest rate hikes, in say even the next 3, 5, 10 years?
Just to stir the pot a bit [lol]…
=================
Businessweek
Outside Shot
September 17, 2009
The Case for a Global Central Bank
With world finance increasingly intertwined, we’ll need one sooner or later
By Jeffrey E. Garten
When the finance ministers and central bankers of the world’s 20 largest economies gather in Pittsburgh on Sept. 24, they can congratulate themselves for averting a 1930s-type meltdown. But nothing the G-20 has done, or is likely to do, will prevent or substantially moderate the next global crisis. That will require deep-seated, global financial reforms. And for such change to take root, something else will be needed: the establishment of a global central bank.
I can hear the howls of critics. World Government! A Conspiracy of Bankers! In the U.S. Congress the aversion to such an institution would make the dogfight over health care look like a genteel dinner party. So right now there is zero chance that the U.S.—and other countries, such as China, that zealously guard their sovereignty—would support the idea. But if critics could suspend the hyperventilating for a few minutes, they’d realize a global central bank is becoming a necessity in today’s complex, interconnected world economy.
…
http://www.businessweek.com/magazine/content/09_39/b4148083571397.htm
No, not really. A global “Fed” would pose the same problem as the US Fed today, which is, let’s face it, totally out of people’s control and posing a serious threat for democracy.
The founding fathers created the federal structures of the US because it is more resilient to a powergrab and it would be if you hadn’t created organizations that link them all together (the parties or rather the one elite behind the parties).
So having many central banks and many currencies is better and more resilient if done right. The only issue with that is speculation with currencies but that could be handled pretty easily.
@Jojo
For me absolutely not, too much power in too few hands, not unlike the Fed.
Change the money spring and change buyer beware construct, to seller beware.
Skippy…why not have a consumer protection agency that really works for the people, not the industry…shezz.
To be fair to the entire institution, most of these complaints don’t apply to all the FRBs, mainly the NYFED & the FOMC.
I don’t think the Dallas, St. Louis, or Atlanta banks, for instance, have been a *complete* catastrophe. Poole, Fisher, & Yellen don’t deserve the same level of vitriol as Geithner, Bernanke, Mishkin, or Greenspan.
“Initially, Milton Friedman and Ben Bernanke have both said that the Federal Reserve caused the Great Depression through its poor monetary policy.”
Lets be fair, they never said that the Federal Reserve caused the Great Depression, they claimed that the Federal Reserve could have prevented the Great Depression if they had exercised correct monetary policy but they did not. The Federal Reserve failed in many ways, but to blame the Great Depression on the Federal Reserve fails to address its true cause and that is a failure to appreciate how damaging it can be to rely on debt to produce growth. The 20s relied on debt too greatly, just as we relied on debt too greatly over the past 30 years.
I think we are beyond asking the question of how “well” the Fed has acted. It has always functioned for the primary benefit of the banks, not surprising since bankers are the ones who constitute it and in many cases run it. It has since Greenspan also been closely tied to the Executive and Presidential policies. The Fed’s failures in creating the housing bubble and the instability in financial markets, responding to them effectively, bailing out an unproductive, deeply corrupt, and completely dysfunctional financial sector, and declaring victory even as the fundamental continue their relentless march to depression expose the dangers of what is an unConstitutional entity.
The Fed did not create the housing bubble, but they did fuel it by throwing gasoline on a fire with low interest rates. They did not create the environment that allowed idiotic mortgage products to be utilized by the American public while the Bush administration turned a blind eye (via the OTC and OCC) to these dangerous mortgage products. The Fed deserves some blame but if laws had been enforced this calamity we are witnessing would not have occurred. The primary blame, the but for test defining the culpret, lays the blame at the toothless bought by lobbyists congress, the wimpy-ass regulatory agencies, the private sector rating agencies, and to a lessor extent the fed. But no one expected the fed to be the true regulators of banks. Investors thought that the market would regulate itself, what a bad assumption.
We are witnessing a failure to enforce, not a failure of regulation. The SEC failed to realize they are the cop on the beat, the OTC failed to realize that they are not the lapdog of the banking industry, and our Congress failed to realize that lobbyists are destroying our nation.
bleh OTC should be OTS (Office of Thrift Supervision)
“The Fed did not create the housing bubble, but they did fuel it by throwing gasoline on a fire with low interest rates.”
There would have been no fire without the Fed’s low interest rates.
“The Fed deserves some blame but if laws had been enforced”
This is an old dodge to deflect blame by putting it on others. The Fed had the keys to money and so the greatest responsibility. It had the best vantage point to see what was happening and studiously avoided doing so. The faults of others in no way diminish the Fed’s culpability.
“But no one expected the fed to be the true regulators of banks.”
Yeah, I mean it’s not like it was a central bank, oh wait.
“Investors thought that the market would regulate itself, what a bad assumption.”
The only people who believed this were rubes. The only people saying it were economists and other con artists.
“Mainstream pundits, of course, say that Bernanke has saved the world . . . ”
I am constantly surprised at human being’s need to feel good, look at mirrors which may you feel good and human being’s short memory! Few stories from my childhood always springds to my mind.
One, the story of “The Emperor has no clothes” where everyone was a cheerleader except a child who does not have blinkers.
Second, the story of “The Brahmin & Goat” — where a Brahmin carrying a goat starts beleiving that he is carrying a cow when all the people (in a group) say that he is carrying a cow (may be a for a prank or wanting to eat goat’s meat).
Third, the story of “Monkey and Flowers” — where a monkey asked for the garland which a visitor to the zoo was carrying and when the visitor being kind-hearted gave to the monkey. The next minute the monkey removed the flowers and threw the garland
Take the case of the above …
Ben Bernanke who claims to have now saved the world is the SAME CLOWN WHO could not see beyond his nose and whose estimate of the expected fallout of the crisis , if it did occur, did not cover the cost of the bailout of one bank! — hyped, applaued and cheer lead by the set of morons at CNBC, CNN etc . aka The Emperor has no clothes and Brahmin & Goat
THE CLOWN being given a second innings is same as providing monkey with a garland of flowers!
THE CLOWN does not understand what could be the result of the loose policies being enacted now …. we will know it later in another 5/10 years as the resukt of policies in 2000-2002 is being felt since 2008.
But human beings being what they are do not see beyond their nose and feel that Ben Bernanke is the Worl’s greatest Wizard, instead of understanding him for the CLOWN HE IS!!
I agree with these points
(1) allegations that the Fed has manipulated the markets; and
(2) claims that the Federal Reserve System saddles the U.S. government and American people with trillions of dollars in unnecessary debt (that would not be incurred if the government took back the “power to coin money” granted to the government itself in the Constitution).
We would not have had this problem without Fed as Fed is responsible for misallocation of resources and speculative fevers leading to the Booms (everybody loves this–ask no queations, enjoy the party, ask no questions — get no lies like -it will not last forever, it is illusory etc.)& then the Bust (start looking for scapegoats and screw it further with policies that further feed to the train wreck down the line) !!
How more disgustingly grotesque can you get in your defense of our financial industry. Could you say that Bank of America is but an uninformed Marie Antoinette? Is Citigroup but a misunderstood King Louis IV?
“Ben Bernanke who claims to have now saved the world ….”
Sorry but Ben Bernanke never claimed to save the world that was a marketwatch.com created fiction. Ben Bernanke never claimed that fact. Create more fiction, please.
“George Washington” could you flesh out a little more of your background please. I find that many of your posts, while fun for discussion, are weak and agenda driven. In my mind this is a surprising direction for Naked Capitalism and hopefully will change.
mikeVA
Initially, Yves does not necessarily endorse or agree with anything in the post.
Second, my background is that I was born in America, raised in America, still live in America, love America, and am part of the 75% of the American public and overwhelming majority of Congress people who want the Federal Reserve audited.
And my “agenda” is writing for the implementation of policies that will create the most prosperity for the most Americans.
The Federal Reserve Criminal Enterprise, the Official War Party of the U.S., has and is performing exactly as planned by the Zionist Moneychangers,otherwise known as the ‘Deviant Race’.
The good news is the Fed is imploding and will very likely be non-existant before 2009 comes to an end. With it goes corrupt governments at all levels and an end to all Banker created wars.
Worse is better for now.
Nice summary of issues & I’d generally agree with the conclusions. But how has the BIS escaped criticism, and why does it get free shots? As one of the main Basle I, II actors, it hasn’t exactly covered itself in glory.
It’s long past time that the Fed was dismantled and abolished. the functions it performs must be returned to the federal government. As a cartel of private banking interests, the Fed serve only itself and the banks. The stated purpose of the Fed is a subtrefuge. It’s true intent, and only intent, was to gain control of monetary policy, and in doing so, gain control of the government. It’s time for the Fed to pass into history.
Is not the Fed the creation of the government? Is not its continued existance dependent on the Congress and the Presidency?
Just how has the Fed failed us? Most directly by its actions to influence interest rates and the supply of credit money. Decisions as to the rates and quantity of the foregoing are best left to the market. In that one must also recognize that the market tends toward inefficiency in its tendency to exceed points of equilibrium.
The dialogue we need to be engaged in is to the point, how can we limit and mitigate the effects of profligate spending and credit money creation? In this, recognize that the currency is the resposnibility of the government. Credit money is the responsibility of the market and a banking system that employs fractional reserves as the controller of credit money creation.
Trainwreck: You dissemble.
Bernanke did not himself directly say he “saved the world” but he most certain has, and is, using that claim by others to his advantage (and actually campaigned for his renom as criminal in chief of OUR money!). He is fully cognizant of the bogus accolades and he most assuredly takes advantage of that, and by his actions and by NOT disavowing the accolade he claims it as his own.
He is a criminal, as is Geithner (and their best buds at Goldman-Sachs, BoA, Citi, etc, etc, etc). They all belong on the end of a rope with the other end attached to a lamp post, Mussolini style.
World Bank Chief Calls For Treasury, Not Fed, To Regulate Banks Clusterstock.
To paraphrase China’s ‘…US finance needs adult supervision,’some common sense from the article:
“… Empowering the Federal Reserve over banks places too much power in the hands of a largely unaccountable bureaucracy.”
Excellent post.
Wow, it’s just me, I know.
But “the Fed” is not the Federal Reserve Bank, nor the federal reserve bankers.
It is not the superstructure of the Mother-Regional-Member banks, and their loyal minions.
In reality, if you will indulge me, the Fed is the private fractional-reserve system of money-creation, that which is carried out by the federal reserve bankers.
When y’all heard Bernanke, Geithner and Obama say that our ‘highest priority was to save the banking system’, did you think they meant any particular group of banks or bankers?
No, it meant to save the fractional-reserve banking system.
It meant to save the private bankers’ power to create the nation’s money and maintain its stranglehold on the American economy – the upshot of which is the acceptance here and elsewhere of a financial system recovery without any jobs. If I didn’t hate the word disingenuous, I might use it here.
The joke on us is that we have a ‘Fed’ system that is supposed to prevent the boom-bust cycles, and yet have the empirically pro-cyclical fractional-reserve banking system creating all money as debt as a multiplier on the way up, and as a divider on the way down.
When Dennis Kucinich introduces his Amercian Monetary and Financial Security act of 2009, I hope the NCers will take a look at how we can get to a system of full-reserve banking – the only suggestion to ever come down the pike that would “systemically restructure” the monetary system to a proper counter-cyclical design.
Jeezum – how’s the Fed doing?
Give me a break.