The Fed

We hear from way too many in the media saying that the markets being too free is what has caused the problems in the economy. This is an absurd assertion and can not be stood for. Freedom has not failed. It hasn't even been given a chance.

I mentioned in a previous post about how our government's tax system has hindered economic progress. In this post I would like to point out how government intervention through the Federal Reserve, not freedom, has played a huge part in the problems we are having in the economy.

While the Federal Reserve (Fed) is a "private" organization, it was started by the federal government in 1913 through the Federal Reserve Act and its Board of Governors are appointed by the president (therefore, it is really a government organization with private components). It is a central banking system for the U.S. that controls our monetary policy and interest rates.

Interest rates are the price we pay for money. In a free system of banking, interests rates would be set by the simple rule of supply and demand. When people save their money in a bank, that bank builds up its reserves. Those reserves are what a bank uses to make loans. If the bank reserves are high it means a lot of people are saving their money for future consumption. This would make the supply of money that the bank has to loan high and the demand for current consumption low, which would make interest rates low. On the other hand, if the demand for current consumption rises it mean less savings, less reserves on hand at the bank, and, thus, less supply of money. This would, by the same law of supply and demand, cause the interest rates, the price of money, to go up.

What has the Fed done to this system? It has destroyed the free market's system for controlling the price of money by arbitrarily setting interest rates to whatever is politically feasible at the time. The theme that I have heard growing up is that consumer spending is what makes the economy go round. Well, this is the false pretense that the Fed works under. So, with this mantra, the Fed sets interest rates arbitrarily low in order to give people "credit" and get them to spend, or consume, now. This causes a boom, or bubble, in the economy. The problem with this is that no saving are there to back the credit driven spending boom up and eventually the bills come due. Unfortunately, many people's, and company's, bills are coming due now. They were enticed, by the Fed setting low interest rates, into irresponsible borrowing and spending and they don't have the savings to back it up. We are currently seeing this have devastating affects in the housing market.

Freedom would have prevented this. It would only be wise, in the free market, to borrow money when the supply of money is high. The supply of loanable money being high would indicate that people are holding off on spending till some time in the future. This would entice one to borrow money at a real low rate now in hopes of putting that money into a productive capacity so that others can consume what was produced with their savings later. On the other hand, if spending began to get too high and savings too low, the banks would then raise the interest rates. This would slow the borrowing of money for future production until the savings were there to back it up again.

Don't buy the propaganda from the political and media elite that tell us that free markets haven't worked and we need more regulation on freedom. That simply means they want to take more of your liberty and freedom from you. We can not stand for such.

We need to end the Fed and get back to sound money and free market principles. Let's give freedom a chance.