Throughout the financial crisis, the Federal Reserve has taken many ambitious and unorthodox actions to fulfill its role as the monetary policy arm of the United States.
This means that the Fed’s balance sheet more than doubled in size and controversy over the organization has grown increasingly more vocal.
Currently, Rep. Ron Paul’s “Audit the Fed” bill, H.R.1207, is making committee rounds in the House, as is a Senate bill, S.604. Although these bills are questionable in their intent, the Fed’s responses to the crisis have been extraordinary and will continue to have ripple effects for some time to come.
On another end of the spectrum, the Foreign Affairs journal named Ben Bernanke, the chairman of the Federal Reserve Board, the No. 1 global thinker in 2009, simply “for staving off a new Great Depression.”
Foreign Affairs is a distinguished political journal the Council on Foreign Relations publishes, whose stated goal is to increase global understanding and cooperation.
However, critics believe the CFR’s true agenda is to create a “new world order” and there is likely large overlap between such critics and supporters of Paul’s bill.
If we cannot take Foreign Affairs’ praise of Bernanke at face value, then it is important to evaluate him and the Fed’s actions by something more objective. The Fed is charged “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates,” according to the Federal Reserve Act of 1913. In other words, the Fed is charged with combating unemployment and inflation, its dual mandate.
Unfortunately, these policy goals are often mutually exclusive, so that an action taken to combat unemployment will often raise inflation expectations and vice versa. This means the Fed engages constantly in a balancing act, leaving someone inevitably unsatisfied with its decisions.
However, the policies adopted during the financial crisis had a more overarching goal — to keep the financial system from collapsing. The growth in Fed’s balance sheet attests to the desperate measures needed in a desperate time.
Although the unemployment rate is high and I’m not eager to enter the job market in May, Bernanke and the Fed successfully maintained the integrity of a system at the brink.
Where Paul and his supporters might yell foul at supposed trespasses, certainly other critics, such as Bentley University economist Scott Sumner, believe the Fed should have done more.
One of Sumner’s chief concerns is that the Fed’s policies were not expansionary enough. He believes Bernanke’s unprecedented decision to pay interest on the reserves that commercial banks are required to keep at the Fed was contractionary, providing incentive for banks to hoard money instead of loan it out.
This mechanism was established for a reason, though.
All the money the Fed has created from expanding its balance sheet is a portent of inflation, and doomsayers left and right have predicted hyperinflation and encouraged investment in gold since this crisis began. Although the dollar might not be especially strong on international currency markets, the high levels of inflation haven’t come.
And, they won’t come.
The mechanism Sumner disdains is a fulfillment of the Fed’s dual mandate and keeps inflation in check by controlling the velocity of money. Currently, the rate paid on reserves is near zero, but I predict the Fed will raise rates following increasing inflation expectations in the market. The popping of the gold bubble will be a testament to the success of this new policy.
Bernanke and his Fed team have lived up to their dual mandate, and their innovative initiatives make them worthy of being named top thinkers.
Brandon is a finance, accounting and German senior.
11 comments
"When force is the standard, the murderer wins over the pickpocket, and then that society vanishes in a spread of ruins and slaughter. Do you wish to know whether that day is coming?
Watch Money. Money is a barometer of a society's virtue.
When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need permission from men who produce nothing — when you see that money is flowing to those who deal, not in goods, but in favors — when you see men get richer by graft and pull than by work, and your laws don't protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that our society is doomed.
Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot. Whenever destroyers appear among men, they start by destroying money, for money is men's protection, and the base of a moral existence." Ann Rand
In addition, Fed operations are already audited by both the GAO and an independent accounting agency in accordance with section 11b of the act. A quick glance at the Federal Reserve Board or the regional banks' websites would show you all the data they release in an effort to be transparent. The Fed is extremely transparent, there is oversight over its operation, and it's constitutional.
Please take the time to educate yourself with legitimate sources.
There is no oversight or transparency.I said audit them, then give them the boot.
It's obvious to me that the only information about fractional reserve banking you've taken in is from propagandist sources. Fractional banking does not mean that banks loan money they don't have. It refers to the regulatory requirement that commercial banks must keep a certain percentage of their liabilities (mostly deposits) in cash in an account at a regional Federal Reserve bank. This serves two purposes. Firstly, the Federal Reserve system acts as a clearinghouse and intermediary between financial institutions that transfer money. This operation aspect is essential for the health of financial system and can prevent or at least detect transfers to illegitimate recipients. Banks are required to hold about 3-5% of their liabilities in account, based upon the composition of their deposits. For instance, a bank should hold more cash for demand (checking) deposits than for savings deposits. Secondly, the reserves provide base holdings for the Federal Reserve to conduct monetary policy.
Banks are allowed to loan out money from deposit accounts that exceeds the minimum reserve requirement, just as any company is allowed to invest in products to generate income. A multiplier effect occurs just as money changes hands in the real world. A bank loans money to someone to buy a home, who gives that money to a realtor, who uses it to buy groceries, then the stores uses the funds to pay their distributors, who use it to pay farmers, who deposit it in their savings accounts where their banks make loans with it and so forth and so on. In each instance, income is created for the individual. This isn't "magic" even if it just occurs between banks. For the banks themselves, deposits (their liabilities) will always equal loan assets plus reserves. This creation of money doesn't inflate their balance sheets.
Moreover, the idea that fiat money is a pyramid scheme only made valuable some payment in the future is nonsensical. So long as you can pay your taxes with it, the dollar has inherent value today. No ponzi scheme. And, calling it a Federal Reserve note just refers to the Fed's role as an intermediary between banks. Remember that historically, banks themselves create paper "notes" to act as currency between them. Referencing the pyramid is just more conspiratorial nonsense ignoring history. As I said before, you do yourself a disservice by believing internet propaganda videos.
Its one thing to loan money you have. But to loan money you do not have (fractional banking) but simply make up as if by magic and charge interest on it is wrong and wrong for a number of reasons and eventual failure is the big one. I realize this magic is legal but its not needed. I call it a ponzi scheme because the last group holding the promise to pay loses and the bank always wins. You can call it what you like. The pyramid on the Federal Reserve (promise to pay) Note in your wallet is to remind you of the nature of the system.
Joe F
No other company in the world is expected to have 100% of their liabilities backed by cash; why should a bank? If banks weren't allowed to leverage, most of them would go out of business (as would most companies), and those who didn't would have to charge outrageous rates to make use of their services. Modern conveniences like free checking are enabled by the fractional reserve system. Eliminating it would be a return to archaic banking and all the high transaction costs that went with it. The Federal Reserve not a ponzi scheme, by any extended definition of the term. You do yourself a disservice by believing internet propaganda videos.