Strike three for the Federal Reserve

The US Federal Reserve, the Federal Reserve System (Fed), is currently destroying the US economy for the third time in its existence. Will the Fed’s strikeout be its final at bat, or will fans of the American economy be burdened by this financier John Gochnaur (the worst player in Major League Baseball history) for another century? Although the currency system’s Ty Cobb (arguably the best batsman of all time), the Gold Standard, ready to hit the pinch?

Remember, the Fed is not just trying to control the macro-economy, it is trying to control it within political constraints. Recent events have exploded any notion that it is an enterprise independent of government, led by sophisticated technocrats who are only trying to find the right tradeoff between output and inflation. To some extent, it interrupts his work due to incompetence like Gochan. To some extent, though, it puts its own interests ahead of the American people.

A strike occurred during the Great Depression of the 1930s. The country was still technically on the gold standard but the international monetary system was such a commotion after World War II (1914-1918) that the Fed enjoyed some domestic monetary policy prudence, the ability to expand funding or contract.

The Fed’s financial position proved too lax in the 1920s, which helped stock prices rise too much foam. After the Great Crash in 1929, however, its position was very strong. Moreover, it has failed to help small banks struggle, many of which have dragged depositors with them. This led to a continuous wave of bank runs until Hyde Park was elected president of Policy Monster in 1932, which hindered economic recovery.

Strike Two was the greatest inflation of the 1970s. The Fed may be forgiven for this because it happened when it switched to a new monetary policy regime, a solution to the trilogy or impossible trinity that for the first time gave it complete domestic monetary policy prudence by freeing up international movement of capital. Foreign exchange rates fully respond to market strength.

But be warned! For the better part of a decade, pundits like NBC Radio’s financial correspondent Wilma Sauss predicted that the Bretton Woods system would have to end at a fixed exchange rate for large budgets and trade deficits. It strongly warned against the devaluation of the dollar internationally, domestic inflation, deficit-prone price controls and the arbitrariness of private stock and bond investors.

The Fed closed a pitch during the 2008 global financial crisis. While it helped create the subprime mortgage bubble with its misconceptions about low interest rates and financial exclusion, it worked well as a lender-of-last-resort. Enough to turn the economy around fairly quickly with massive subsidies in the banking sector. The strategies employed were suboptimal but at least the Great Recession did not turn into another depression.

The Fed, however, has whipped up in 2020-21. Congress should have started aggressively raising rates in response to the huge COVID financial stimulus that it passed that year. In fact, it could only save America from the pain caused by the lockdown Threat To offset stimulus with high interest rates.

Lockdowns rationally made stimuli necessary, but lockdowns were clearly unnecessary. AIER has been arguing strongly against the lockdown for more than a year, and its position has been proven economically and scientifically. Uncontrolled by lockdown regulations, retailers, gyms and other businesses soon realized that they only had to implement special hours or days for masked / waxers and other special hours or days for antis. Experiments will soon reveal that any Covid protocols will suffice to suppress so-called superspeeder events in a variety of contexts, allowing most economic activities to continue relatively seamlessly without making the epidemic worse.

But instead of sticking to its so-called 2 percent inflation target, the Fed is facing pro-lockdown political pressure and keeping interest rates low, even after the temporary threat of inflation has passed by the end of the summer of 2020 and prices have begun to rise steadily:

The Fed is finally aggressively raising interest rates but in the process it is making the biggest operating losses in its history. So, why didn’t the Fed resist the huge fiscal stimulus in 2021 with tighter monetary policy? In the end, it doesn’t matter. Bad batsmen always have excuses. The sun was in my eyes, the callus cheated, I’m just in a recession (aka my strikeouts are fleeting), or I’m betting a lot of money on another team. Meanwhile, the fans at the stand know that it doesn’t matter, ya strike out!

No batter is always the base but America, rather the world, has a high quality pinch heater that it benched a century ago: the gold standard. It’s not perfect but it’s much better and fairer than the Fed. Returning the value of gold, or some other product, should not be intimidating. This means the market forces replacing technocrats with dubious powers or motivational financial policies, the same market forces that develop products and technologies that seemingly magically whenever and wherever consumers want them. Money does not have to be different.

Robert E. Right

Robert E.  Right

Robert E. Wright is a Senior Research Fellow at the American Institute for Economic Research. He is the author (or co-editor) of more than two dozen major books, book series and edited collections, including AIER. Best of Thomas Payne (2021) and Financial exclusion (2019). He has also written numerous articles for (including) important journals, including American Economic Review, Business history review, Independent review, Journal of Private Enterprise, Money reviewAnd Southern Economic Review. Since taking his PhD, Robert has taught business, economics and policy courses at Augustana University, NYU’s Stern School of Business, Temple University, University of Virginia and elsewhere. History from SUNY Buffalo in 1997.

Selected publications

  • Reducing Recidivism and Encouraging Prevention: A Social Entrepreneurial Approach Journal of Entrepreneurship and Public Policy (Summer 2022).
  • “The Political Economy of Modern Wildlife Management: How Commercialization Can Reduce Game Excess.” Independent review (Spring 2022).
  • “Sowing the Crisis of the Future Crisis: The Rise of the SEC and the Nationally Recognized Statistical Rating Organization (NRSRO) Division, 1971-75.” Co-author with Andrew Smith. Business history review (Winter 2021).
  • “AI ≠ UBI Income Portfolio Adjustment to Technological Transformation.” Alexandra Prozegalinska co-author. Boundaries of Human Dynamics: Social Networks (2021).
  • “Liberty is for everyone: Stowe and Uncle Tom’s cabinIndependent review (Winter 2020).
  • “Pioneer Financial News National Broadcast Journalist Wilma Sauss, NBC Radio, 1954-1980.” History of journalism (Fall 2018).
  • “The Evolution of the Republican Model of Anglo-American Corporate Governance.” Progress in the financial economy (2015).
  • “The Leading Role of Private Enterprise in the American Transport Age, 1790-1860.” Journal of Private Enterprise (Spring 2014)
  • “Corporate Insurers in Antebellum America.” Co-author with Christopher Kingston. Business history review (Autumn 2012).
  • “The Deadlist of Games: The Institution of Dueling.” Co-author with Christopher Kingston. Southern Economic Journal (April 2010).
  • “Alexander Hamilton, central banker: Crisis management during the 1792 U.S. financial crisis.” Richard E. Silla and David J. Co-author with Cowen 6 Business history review (Spring 2009).
  • “Integration of Trans-Atlantic Capital Markets, 1790-1845.” Co-author with Richard Silla and Jack Wilson. Money review (December 2006), 613-44.
  • “Converting the state into ‘currency’ and the US dollar: to clear up some confusion.” Co-author with Ron Michner. American Economic Review (June 2005).
  • “US IPO Market Reform: Lessons from History and Theory,” Accounting, business and financial history (November 2002).
  • “Bank Ownership and Lending Types in New York and Pennsylvania, 1781-1831.” Business history review (Spring 1999).

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