End the Fed

The Federal Reserve was created in 1913 with the primary purpose of avoiding a chain of bank runs, also known as a bank panic. On March 11th, 2008 Bear Stearns suffered a bank run. Exactly four months after that, IndyMac bank went through the same thing and on September 25th, 2008 Washington Mutual had to temporarily shut down in order to avoid a full out bank run. With several other banks now at risk of similar fates it is evident that the Federal Reserve system has failed to do what it was created for. So why should we uphold this failing institution? We shouldn’t. It is time to end the Fed.

The system currently plays an integral role in the markets through setting the interest rate and controlling the monetary supply. These powers were given to it in order to maintain a stable market. It obviously hasn’t worked. Not only has it failed to do its job, but it has actually harmed the markets by making the economic climate less stable in the long run. Here’s how:

Setting the interest rate
One of the jobs of the current Federal Reserve is to set the interest rate. The rate plays a huge role in loans because higher rates mean less loans and less credit created, whereas lower rates do the opposite. This has a titanic effect on the modern, credit-based economy. There is a problem with the current system though: the market is far too big for anyone to accurately gauge it and set the rate for it. This is because so many variables play a part into it and no one can measure all of them (especially emotions and confidence.) What ends up happening when the Fed sets the rate is that bubbles and economic stagnation are created when the rate is too low or too high respectively. This has played a big part in the recession-boom business cycles we have seen in the 1900s. Perhaps the most drastic example of the destruction caused by the Federal Reserve setting the rate is in the current economic crisis- which almost all experts, Keynesians and free market capitalists alike, agree was largely driven by Alan Greenspan’s low rates. Greenspan, the former chairman of the Fed, ushered in an era of historically low rates and as a consequence really drove the housing bubble to levels it would have never reached had the rate been higher.

The better alternative would have been to simply let the market set the interest rate through competition. The institutions and people that actually lend and borrow would compete for the best rates. The whole scenario would be driven by the omnipotent laws of supply and demand and lead to fair rates for both borrowers and lenders that are also sustainable in the market.

Controlling the monetary supply
Another major power that the Federal Reserve has is controlling the monetary supply. The Fed currently controls the creation of money in two ways: having its hand in how much money is printed and by being the driving force behind the fractional reserve banking system. In theory, the Federal Reserve would use its control over the monetary supply in order to keep prices stable, so that there is not excessive deflation or inflation. It is also supposed to use this power in order to maintain an elastic currency, so that there is always enough money to fuel the fractional reserve banking system, so that bank runs don’t happen (which obviously didn’t work out how it was supposed to.)

By again taking a look at the current crisis as well as history, it is clear that the Federal Reserve has not and cannot maintain a sustainable or healthy monetary supply. Currently, the Fed is printing tons of money in order to make up for the money that the government cannot raise through the sale of securities (i.e. bonds.) This is creating monetary inflation, which is essentially a tax on the people because the buying power of the dollar falls when it occurs during periods of slow economic growth. The system is not fair to the people, nor is it sustainable.

Fractional reserve banking is also very unsustainable, especially with our current reserve requirements, because it essentially demands unlimited exponential economic growth. If there is not exponential economic growth, then the monetary supply inflates because there is still exponential growth in the monetary supply. Trying to have unlimited exponential growth is obviously impossible and trying to create unlimited exponential growth actually ends up making bubbles that eventually pop, like the housing bubble that created this crisis.

Exponential growth forever is not possible and the other alternative in the current system, inflation, is not fair. So why do we put up with it? A better alternative would be to end the Fed, which would almost certainly bring down the fractional reserve banking requirements and hence, create a more stable system. It would also lead to less inflation as less money is created.

A disastrous institution
This current Federal Reserve system has hurt the market more than it has helped it and if it continues the way it is operating, we Americans face severe consequences. Aside from the unstable environment it is creating, we also face the risk of something even worse due to the Fed’s control over the monetary supply. That worst case scenario is hyperinflation.

The Federal Reserve, a group of men that isn’t even elected by the people, has the tools in its hands to inflate the currency as much as they want to. Central banks usually try not to inflate currency too much, but when the country in question is in massive debt and continues to spend massive amounts of money (like the United States is currently doing) they usually do end up inflating the currency a lot and the citizens of the country have to pay for it. It is the tax that the politicians never talk about. Inflation reduces the buying power of the dollar and with that we have to pay more dollars to buy the same things we used to pay less for. It works out to be just like a tax. Sometimes it gets out of hand to the point where the money is worthless and that is the day when the economy collapses. For those who think this won’t happen to us, it is important to look at history and the numerous cases of hyperinflation. It might just surprise you how many times entities that control a fiat money supply (such as the Fed) have destroyed the currency.

The examples can be seen throughout history and most of these cases were at the hands of national banks or similar entities: Angola and Argentina in the early 1990s, Austria in the early 1920s, Belarus in the mid 1980s, Brazil from the mid 1980s to 1994, Bulgaria in the early 1990s, Chile in the early 1970s, China in the late 1940s and early 1950s, the Free City of Danizig in the early 1920s, Georgia in the mid 1990s, Germany in the early 1920s (the Weimar Republic,) Greece in the early 1940s, Hungary in the mid 1940s, Israel in the 1970s and early 1980s, Japan in the early 1940s, Krajina in the early 1990s, Madagascar in the mid 2000s, Mozambique in the 1990s and early 2000s, Nicaragua in the late 1980s, Peru in the late 1980s, the Philippines in the early 1940s, Poland in the early 1920s and again in the early 1990s, the Republika Srpska in the early 1990s, Romania in the early 2000s, Russia in the early 1920s, Turkey throughout the 1990s, Ukraine in the mid 1990s, Yugoslavia in the late 1980s and early 1990s, Zaire in the early and mid 1990s, Zimbabwe currently, and the United States in the early to mid 1880s.

And these examples are only of hyperinflation- it does not include inflationary struggles not classified as hyperinflation. Is it really crazy to think it can’t happen to us?

End the Fed
The Federal Reserve literally has the power to destroy this nation’s economy. It can tax us at will with inflation. It can control the demand for loans. It can create as much money as it wants to. Despite all of these very potent powers, the Federal Reserve is a very opaque institution, in that there is very little transparency to it. They recently even refused to release information about the whereabouts of some of the bailout money to Congress. They refused to respond to Congress, so why would they bother to even report to the people? AIG ended up releasing some of the information that the Fed refused to give out.
It is a very secretive and unjust institution and it must be ended. The organization affects every single American and has the power to make us richer or poorer, yet it refuses to report to us. Is this acceptable?

The Federal Reserve has too much power and it has not even been able to do what it was created for. We need to abolish the system before it makes things even worse with even more market distortions. Congressman Ron Paul recently sponsored HR 1207, which would allow Congress to audit the Fed. It is a step in the right direction because it will really make the people aware of the misdoings by the central bank. Paul and other free market capitalists are for abolishing the Federal Reserve all together, but this is a means of really convincing others of the damage that the institution is causing. It is time to act on this together as citizens by contacting your Senator and Representative and letting them know that you want HR1207 passed (as well as maybe suggesting the abolishment of the Fed altogether.) It is time to audit the Fed, so that one day we can finally end the Fed.

Aside: You can buy End the Fed, Ron Paul’s upcoming book of the same title as this post right now (through preorder) by clicking the book image in the sidebar (to the right) or by clicking the link above.

Why the market should set the interest rate

Currently the Federal Reserve sets the interest rate for the United States. This is one of the most inefficient things that the government does for this country. Why? Because the market is simply too large and too vast for any one group of people to gauge it. Everything including emotions, news, government actions, and even estimates effects the market and no one has the knowledge to analyze all that information. This is why the market should compete to set the rate and hence provide the best rate for borrowers that is still sustainable for the economy in the long run.

The central bank setting the interest rate has only created recessions, led to bubbles, and stunted growth. When the Fed makes the rate too low it leads to more loans (for the obvious reason,) which often end up creating artificial growth that is unsustainable. This can clearly be seen with the bubbles in recent history, especially with the housing bubble that just burst. Alan Greenspan’s dangerously low rates ended up created a large influx of growth in the housing market, only for it to all come crashing down because it was artificial growth pushed by the low rates. When the Fed pushes rates too high, people take out less loans and hence sustainable growth could be stunted.

If the Federal Reserve didn’t set the rate, supply and demand would set it naturally through the market. If there was a shortage of borrowers, rates would go down to encourage growth and if there were too many borrowers, rates would go up in order to stunt artificial growth. It is a system that works itself out.

The Fed setting the rate has only led to trouble and it will continue to do so unless we let the market set the rate. Why not allow the banks and the people actually giving the loans to compete with each other? Why not allow the market to set the rate?

When will we realize?

When will we fight up against this injustice? When will the time come when we realize that what we are doing is driving ourselves to our own end? Will it be when the dollar collapses and we are left in ruins?

It is time to take a stand against big government, socialism, and government intervention. It is time to take back our personal freedoms, to fight for what we once stood for, to reclaim our name because if we don’t, we are doomed.

The government continues to print money and ignore the Constitution as it tries to get us out of this mess it has created. The White House recently took money from the TARP (Troubled Assets Relief Program, also known as the $700 billion bailout) to help bail out the big three, something that Congress voted AGAINST. The Federal Reserve continues to regulate the currency, when in fact the Constitution says that CONGRESS should be doing that. It also has the power to set interest rates and hence, meddle with and distort the markets. To add the cherry on top, Ben Bernanke heads the Fed. Who elected Bernanke? No one. So how is he representing the American people? He is not.

What many fail to realize is that it was market intervention that created this mess and it is intervention that will create a bigger mess. Alan Greenspan’s policies created bubbles and it is partly his actions that have led us to where we are today. We are in a recession. We must accept it and let the market fix it. It may cause hardship temporarily, but we must suffer for what we have done to ourselves. If we continue to intervene and distort the markets even more all we will do is create a bigger problem that will not only hurt us later on, but it will also hurt our children and our grandchildren. Look at what we did after the stock market crash of 1929 and how that turned out. There was a massive spike in government intervention and all that did was create and prolong a decade long depression, which only ended because of a World War. Do we want it to happen again? Is it fair to us or our grandchildren?

We must act now if we want to save our nation from a long term disaster. It is time to tell our leaders what we, the people, want. Your voice does make a difference and it is not hard to be heard in this age of information. Send an email to your local leaders, to your governor, to your Congressman, to the president (and president-elect.) All it takes is a little bit of typing and a click. We must let ourselves be heard and stand up against the big government monster. It is time to let our leaders know that we don’t care about the politics. They need to forget the rivalries and the feuds. They need to unite for the nation, to do what is best for the people. We must tell them to stop thinking about reelection and start thinking about fixing our nation. This means listening to the people, not the corporations, not the lobbyists, not the unions, but simply the people. It is our country, it is our future, and it should be our government.