If people are criticizing the Federal Reserve, it’s overwhelmingly likely that they are focused on the central bank’s poor conduct of monetary policy.
And there’s plenty to criticize, as documented in this video featuring Professor George Selgin.
I also have a video, explaining how central banks arose and noting that private markets were responsible for money in the past and could fulfill that role in the future (John Stossel also has weighed in on that topic)
It’s important to understand, however, that the Fed’s powers – and its ability to cause mischief – are not limited to monetary policy.
Let’s look at some excerpts from a Wall Street Journal column by John Cochrane, a Cato adjunct scholar and professor at the University of Chicago. We’ll start with a look at the expanded powers of the Federal Reserve.
We are used to thinking that central banks’ main task is to guide the economy by setting interest rates. …Since the 2008 financial crisis, however, the Federal Reserve has intervened in a wide variety of markets, including commercial paper, mortgages and long-term Treasury debt. At the height of the crisis, the Fed lent directly to teetering nonbank institutions, such as insurance giant AIG, and participated in several shotgun marriages, most notably between Bank of America and Merrill Lynch. …Many Fed officials, including Fed Chairman Ben Bernanke, see “credit constraints” and “segmented markets” throughout the economy, which the Fed’s standard tools don’t address. …In his speech Friday in Jackson Hole, Wyo., Mr. Bernanke made it clear that “we should not rule out the further use of such [nontraditional] policies if economic conditions warrant.”
But are these developments good or bad? Professor Cochrane is worried.
…the Fed has crossed a bright line. …an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials. In addition, the Fed is now a gargantuan financial regulator. Its inspectors examine too-big-to-fail banks, come up with creative “stress tests” for them to pass, and haggle over thousands of pages of regulation.
And he provides an example of what happens when the Fed no longer is bound by the rule of law.
A revealing example of where we are going emerged last spring, admirably documented on the Fed’s website. Using its bank-regulation authority, the Fed declared that the banks that had robo-signed foreclosure documents were guilty of “unsafe and unsound processes and practices”—though robo-signing has nothing to do with the banks taking too much risk. The Fed then commanded that the banks provide $25 billion in “mortgage relief,” a simple transfer from bank shareholders to mortgage borrowers—though none of these borrowers was a victim of robo-signing. The Fed even commanded that the banks give money to “nonprofit housing counseling organizations, approved by the U.S. Department of Housing and Urban Development.” …you can see where we are going: Hey, nice bank you’ve got there. It would be a shame if the Consumer Financial Protection Bureau decided your credit cards were “abusive,” or if tomorrow’s “stress test” didn’t look so good for you. You know, we’ve really hoped you would lend more to support construction in the depressed parts of your home state.
This is both outrageous and worrisome. It’s outrageous because there is no legal authority for this form of coerced redistribution. But it’s worrisome because the Fed is seeking to things that should be well outside its mandate, such as dictating the actions of the financial sector and engaging in cronyism.
This doesn’t mean we’re suddenly as corrupt and inefficient as Argentina, but it does mean that we’re drifting in that direction. And don’t think it’s impossible. Argentina used to be a rich nation before the statists took control.
We’re already making similar mistakes in other areas, as evidenced by the green energy scam. Now it’s happening with the Fed. Next thing you know, you’ll wake up one day speaking Greek, Italian, or Spanish.
P.S. Shifting back to monetary policy, here’s Julie Borowski’s Fed-bashing video (she also narrated this video on the third-party payer problem), and here’s the famous “Ben Bernank” video.
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I just don’t understand how QE1 and QE2 were even legal? Does the Fed have the right to buy treasury bonds? I guess they do. I noticed that you condemned this efforts in your New York Post on Nov 14, 2010:
When I was growing up, China’s Communist leaders would attack the United States as “capitalist running dogs.” How the world has changed: Chinese leaders now publicly fret about America’s reliance on “outmoded central planning.”
Talk about being called ugly by a frog.
The Chinese official specifically was referring to the Federal Reserve’s decision to pump $600 billion of extra liquidity into the economy. But instead of being called “QE2,” this new bout of quantitative easing should be called the “Titanic.”
Daniel J. Mitchell, a Cato Institute senior fellow, is co-author of Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It.
Interest rates already are very low, so the argument from the Federal Reserve and the Obama administration that the economy is being hindered by high interest rates is laughable.
________
I agree with you and Ron Paul and think the Fed is out of control, but is what they are doing even legal? If they didn’t do QE1 or QE2 would Bush and Obama still be able to run up our national debt?
Central banking was perhaps one of the few areas where Europe had better policy. The ECB had maintained the narrower mandate of monetary stability. Of course that was then and if the pace of decline is any indication, the ECB is poised to soon overtake the FED in manipulation and economic distortion. After all the fed has been around for a long time and has had time for cronyism and the illusions of central planning to settle in. By comparison the ECB, though not quite as corrupt yet, seems to be on a turbo charged path to overtake the Fed on intervention. The latest European public hope seems to be that prosperity is not the sum of goods and services that people produce, but rather prosperity is the amount of money that the ECB prints.
Seems like the western world is in a race to see who can decline faster.
Now where’s part 2 of your video series on banking?
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