The Fed’s Failures

Tait Trussell is a national award-winning writer, former vice-president of the American Enterprise Institute and former Washington correspondent for The Wall Street Journal.


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The Federal Reserve is considering trying to play God again. This time the central bank is about to buy more mortgage-backed securities in hopes that this will help boost the economy. The action was reported Oct. 21 by the Wall Street Journal.

It’s no wonder only one-third of the country’s voters view the Fed favorably, as was found by the Rasmussen Reports polling organization in its Oct. 21 report.

When the Fed meets again Nov. 1, it is bound to face fiery opposition from those who think the central bank has done all it can do—and probably quite a bit more—to revive our slumped economy, including printing lots of money.

Supporters of mortgage-bond buying are emerging, the Journal wrote, particularly Federal Reserve Governor Dan Tarullo, who was appointed by President Obama in 2009. Tarullo appears to be “firmly in the camp of activists…who want the Fed to do more to spur growth.” It has hardly been a roaring success so far.

The Fed itself caused our financial crisis, in the judgment of some Fed watchers, by driving interest rates down and expanding the money supply. A few weeks ago, the Fed tried what some called “operation twist.” It was an attempt to push down creeping interest rates by buying long-term Treasury debt and selling short-term debt.

Markets went into a tailspin after the Fed’s new policy was announced. Stocks and bonds, as well as commodities, fell in price. It was the most dramatic drop since 2008.

“Because of continued rising inflation and the Federal Reserve’s suppression of interest rates, investing in traditional safe havens such as savings accounts, mutual funds and Treasury bonds has become unprofitable,” Rep. Ron Paul (R-TX) wrote in the Daily Bell. Although Paul may have some screwy foreign policy ideas, he understands Fed deficiencies. “Desperate investors” move their money around searching for long-term profits and stability. Investors will continue to shift their money until the Fed stops its intervention and “lets interest rates be set by the free market.” Small business people, Paul explains, “are misled by the Fed.”

As for purchasing mortgage-backed securities, this is nothing new for the Fed. To further reduce long-term rates, it has amassed more than $2 trillion in government debt and mortgage-backed securities in recent years.

The Federal Reserve, through its power to change interest rates and purchase vast amounts of financial assets, has exercised more influence over economic growth and the level of employment than any other part of Washington.

Internal divisions limit the Fed’s ability to pursue some measures. Three of the board’s seven members, who regard inflation as a more serious threat to the economy than unemployment, voted against holding rates down. The bank also has faced pressure from Republican leaders in Congress and Republican presidential candidates, who argue that further steps to stimulate the economy could weaken the dollar or increase inflation.

The Fed’s success in reducing rates through its rounds of asset purchases has not brought predicted benefits. Mortgages and small-business loans may be cheap, but because lenders are so cautious about the unpredictable Obama administration, the loans aren’t easy to get. (On a personal note: I was lucky enough to refinance recently with a 4 percent rate, despite the bank’s having to jump through multiple regulatory hoops caused by the hideous Dodd-Frank law.)

Since the financial crisis began in 2007, the Fed has been moving into unexplored waters, “aggressively intervening in deals to prop up or sell of failing institutions, making loans available to banks in new ways and buying vast amounts of assets to help keep the global economy afloat,” according to The New York Times.

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  • Stephen_Brady

    There's an old Laurel & Hardy short, in which Stan destroys Ollie's marriage, his house, and his Civil War sword. He was only trying to help, you see. As Ollie sits in the ruins of his house, bricks falling one-by-one from the chimney onto his head, Stannie says, "Well, I guess I've done about all I can do." As he walks away, a thunderstorm deluges poor Ollie.

    It would appear that the Fed has done about all it can do …

  • StephenD

    “The Fed itself caused our financial crisis, in the judgment of some Fed watchers, by driving interest rates down and expanding the money supply.”

    The entire problem is the Federal Reserve can run amuck without any real consequence since they aren't an entirely Government Agency but rather a Banking Cartel. So all the talk does nothing. This is a private concern that has more power than Congress to affect the lives of every American. With the swipe of a pen, Bernanke could make your treasury bonds worth less than when you bought them. THAT is a lot of power that we didn’t vote to be in the hands of one small group of people. It ought to be abolished.