The Fed’s Failures

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As the financial system was on the brink of collapse in late 2008 and early 2009, the Fed made up a whole new rule book, not only slashing interest rates virtually to zero, but pumping well over a trillion dollars into the economy through purchases of securities and the creation of new lending. Some economists credit those actions, known as quantitative easing, along with the federal bank bailout, with preventing a global depression. But they also made the Fed the focus of unusual criticism.

The day after last November’s elections, the Fed announced that it would buy $600 billion in government debt, calling the recovery “disappointingly slow.” The effort, nicknamed QEII, drew fire from conservatives worried about inflation and from countries around the world. They saw it driving up their export prices by weakening the dollar.

Mortgage loans have seldom been available at such low interest rates. But companies aren’t hiring new workers, and people aren’t buying homes. Almost 25 million Americans can’t find full-time work, a number that is rising again after declining slightly.

More than 25 million people are unable to find full-time jobs. Concerns about Europe’s economic health and the political sickness in Washington have depressed consumer confidence to the lowest levels since the 2008 crisis.

When rate cuts lose their impact, central banks turn to “quantitative easing” — unorthodox methods of pumping money into an economy and working to lower interest rates that central bankers don’t usually control. Their effect is the same as printing money in vast quantities.

The Federal Reserve has used a variety of lending programs in trying to revive corporate and consumer lending. Since 2008, the Fed’s balance sheet has swollen from about $900 billion to more than $2 trillion as the central bank has created new money and lent it out through all its new programs. If the Fed completes its plans to buy up mortgage-backed debt and consumer debt, the balance sheet will peak to $3 trillion.

Since the American economy plunged into its worst financial crisis since the Great Depression. Bernanke and the Fed have been bailing out financial institutions, printing money in unheard-of volumes and stepping in to fill the lending gap left by crippled capital markets.

Republican lawmakers now portray the Fed as the symbol of heavy-handed big government. But liberal Democrats have accused the Federal Reserve of caving in to demands by banks for huge bailouts and for failing to protect consumers against dangerous financial products.

The ire at the central bank is sure to figure into the continuing debate over how to reform financial regulations. The Obama administration has proposed consolidating regulatory powers under the Fed, while some in Congress want to rip away its oversight.

The Fed has invested more than $2 trillion in a range of unprecedented programs. Critics, however, describe the results as lackluster and warn that added policies could make it more difficult for the Fed to control inflation.

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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.