Wednesday, August 18, 2010

Is The Federal Reserve System Nohting But A Wild Guess?

Sorry about that last post, hit the send button prematurely. I was intrigued by an article written by Al Lewis that appeared in the Wall Street Journal insert to last Sunday's Tampa Tribune. He was talking about the Federal Reserve Board and System and had some interesting observations.

But before we see what Mr. Lewis was talking about, I decided to do some back ground on the Federal Reserve Board. From various online sources I came up with the following information:
  • The Federal Reserve System was formed by an act of Congress, the Federal Reserve Act, in 1913 after a serious of severe bank panics.
  • The Board appears to have four major functions:
  1. Conduct the nation's monetary policy.
  2. Supervise and regulate banking institutions.
  3. Maintain stability of the financial system.
  4. Provide financial services to depository institutions, the U.S. Government and others.
  • Monetary policy usually involves manging the supply of money through interest rate manipulation to achieve a set of economic goals, which usually include low unemployment and stable prices.

Given these functions and background information, how well has the Federal Reserve System performed:

  • Given that it was formed in 1913, it apparently did not perform very well in the 1930s, the time of the Great Depression, or the past few years, the time of the Great Recession.
  • It does not appear that it has historically done a great job at regulating and supervising banking institutions since the high number of bank failures and banking instruments were the prime causes of both the Great Depression and Great Recession.
  • It obviously did not do a good job at maintaining the stability of the financial system since it belatedly forced Congress to quickly pass the poorly written, poorly implemented and very expensive TARP legislation because the Federal Reserve did not foresee the gathering storm clouds leading up to the Great Recession.
  • Regarding monetary policy, while prices have been relatively stable in the U.S., unemployment continues to be very high, earning the Fed a failing grade in this area of its responsibility. The scary aspect of their monetary policy management is the fear from both sides of the economic spectrum, those that say inflation will explode at some point in time and those that say we are facing a deflationary period. In either case, the Fed could be very close to missing on their stable prices responsibility.

Thus, I always felt that the Federal Reserve Board and System performed just as poorly as every other government entity when it came to the latest recession (FDIC, HUD, Fannie Mae, Freddie MAC, the Treasury Department, House of representatives banking and housing committees, Senate banking and housing committees, SEC, etc.). When you look at what we have been through over the past two years and compare it to the charter responsbilities of the Federal Reserve Board, you see that they have indeed been less than stellar in managing the economy.

But Mr. Lewis' column this past Sunday puts it all in perspective. He reviewed the following timeline in the Federal Reserve's position on our economic condition:

  • In January, the Fed said that"economic activity has continued to strenghten and... the deterioration in the labor market is abating."
  • In March, the Fed said that"activity has continued to strenghten ... and the labor market is beginning to improve."
  • In April, "the labor market is beginning to improve."
  • In June, "economic recovery is proceeding and...the labor market is improving gradually."
  • But in August, "the pace of recovery in output and employment has slowed in recent months."

What does this all mean? Let Ben Bernanke, the Fed Chairman explain to us, according to Mr. Lewis: "My best guess is we will have a continued recovery but it will not feel terrific." The key words in the Chairman's statement is "my best guess." Given that the economy has continued to get worse since the fourth quarter of 2009 and the unemployment rate is just as bad now as it was in January, nothing has strenghtened, nothing has improved, nothing has abated, nothing. And now, the leading economist and bank regulator in the country has been reduced to giving his best guess as forecasts. We are not paying high taxes for guesses, we need foresight. I can get someone to guess for far less money that what we are paying the Fed.

Just another government entity that has not done its job. Whether it was the SEC staffers that were surfing the Internet for porn during the lead up to the Great Recession, the Interior Department employees that did not do their required due diligence in supervising oil drilling rigs in the Gulf, Federal consumer safety organizations that missed the Toyota and lead laced toys problems, etc., we pay high taxes for low performance across the board when it comes to the Federal government.

That is why Step 1 and Step 34 from "Love my Country, Loathe My Government" are so important. Step 1 would start downsizing government by reducing its size and reexamining the entire government structure to find ways to make it more effective, including the semi-independent Federal Reserve Board. Step 34 would remove those politicians that sit on Congressional committees from their post if those committees allow lax or sub par performance from government functions to continue. We can all do better than guessing when it comes to the business of the nation.

Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.

Also visit the following sites for freedom:

http://www.cato.org/
http://www.reason.com/
http://www.robertringer.com/
http://www.realpolichick.blogspot.com/
http://www.flipcongress2010.com/

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