The Fed Might Prove Useful After all
I am not a fan of the Federal Reserve Board. I have always regarded it as a boondoggle that empowers a few bankers at the expense of the American people. But it seems there might have been some merit in creating the Fed, after all.
Back in 1913, President Woodrow Wilson persuaded Congress to establish an independent body to manage the flow of American money. The idea was to keep currency control out of the hands of politicians. Later, Wilson is said to have regretted his decision and is widely (but perhaps apocryphally) quoted as lamenting, “I have unwittingly ruined my country.”
On the face of it, the concept of the Fed is absurd. Basically, it has the government printing money, giving it to the Fed and borrowing it back at interest. Why, I have always wondered, doesn’t the government just keep the money it prints and save the interest?
But I am no financial genius.
The Fed’s mission is based on a “dual mandate” to maintain stable prices and full employment. And I don’t think it has achieved anything close to that mandate over the years. But I have to admit it might finally have done something useful. Risky – but useful.
With a dysfunctional Congress stalled by ideological gridlock, President Obama’s best efforts to revive America’s economy and alleviate the misery of millions have been blocked. He has been unable to get a jobs act passed, for example, and that would have put hundreds of thousands of Americans (maybe millions) back to work.
Sadly, this gridlock is intentional. The Republicans have made no secret of their strategy to win the White House by undermining the economy and blaming the president for the ensuing slump.
Apparently their plan did not reckon with the Fed.
Chairman Ben Bernanke (photo above) has come riding in like the cavalry to save the day. He has announced that the Fed is going to buy up as many millions of dollars worth of treasury bonds as it takes to kick start job growth. To begin with, the board is buying $23 billion worth of mortgage bonds, and is holding interest rates to near zero at least until 2015.
That could help clear the logjam blocking the housing market’s recovery – and get the economy flowing freely again.
Of course, the future is still uncertain. Flooding the economy with cash is one way to stimulate spending, but there’s another essential component – demand. For the economy to recover, Americans have to start buying stuff again. And, while consumer confidence is on the rise, there’s no guarantee of an adequate resurgence in demand.
The catch 22 is that to buy stiff, we need money, and to earn the money we need jobs. So, to create jobs, we need to have jobs.
Still, most economists agree that the Fed’s latest move will have a stimulative effect.
Unfortunately, it is sure to come at a price. You can’t just keep dumping dollar bills on the world’s financial system without diminishing their value. And, usually, that leads to inflation.
But that’s a long-term thing, and in the meantime, the Fed’s gotta do what the Fed’s gotta do.
And when you have a Congress that is deliberately sabotaging the country’s economy, it’s high time for the Fed to step in.