By Stephen Buller
The cry has fallen on deaf ears for many years, but as the Fed struggles on both sides of its “dual mandate” to promote maximum employment and stable prices, more and more Americans are becoming aware of our central bank, what its role is, and its impact on our daily lives.
It’s important to understand the power and influence the Fed has: 99.9% of the world’s population live in a country with a central bank, and their monetary policies are affected – if not dictated – by those of the Fed. For as long as the United States dollar remains the world reserve currency, that is unlikely to change.
The Fed is the United States’ third central bank, created when Congress approved, and then-President Woodrow Wilson signed into law, the Federal Reserve Act of 1913. The Fed operates under a board of directors whose seven members are nominated by the President and confirmed by the Senate.
With a name like “the Fed,” you might assume this central bank is part of the federal government. It is not. It is a private institution, owned by its member banks and their owners. The board are federal employees, but other Fed employees are paid by their member banks, which have operating expenses like any organization. Member banks also receive dividend payments.
If anything is confusing yet … yes, it is – I would argue intentionally so. Sometimes, specific language is required to describe complicated concepts. Sometimes, it is used to obfuscate reality: “Liquidity” means cash, “quantitative easing” means currency creation, and “monetary policy” means manipulating the quantity of currency and interest rates.
I don’t cry “End the Fed” because I see poor management of a good system. I see mediocre management of an inherently broken and evil system. The Fed’s goal – to promote maximum employment and stable prices – sounds positive, but it results in a loss of purchasing power, malinvestment, and warped markets.
Every time the Fed creates new dollars to bail someone out, every other dollar loses value. This steals from everyone through the stealth tax of inflation, and discourages the basic human value of saving for the future. The result is out-of-control household, corporate, and government debt.
Every time the Fed bails out a company, mortgage, or treasury, they reward that entity with a purchase price nobody on the free market would have paid. This manipulates market prices and promotes moral hazard by incentivizing market participants to take extreme risk, knowing their gamble will either win big or be insured by the Fed. The result is higher stock, bond, and real estate prices relative to current wages, and widening wealth inequality.
A large society certainly needs systems to manage its currency, but as soon as a fiat currency is implemented, the true cost of products, services, investments, and even wars, is lost. When you introduce the human element – corruption and bias – the choosing of favorites is inevitable.
To bail out an organization with new currency is to make everyone pay for the failure of an entity whose prior profits were distributed only to its owners. We’re told this is a good idea because they were “too big to fail.”
Failure is a healthy part of the business cycle – and life – clearing unprofitable ventures and making way for smarter entrepreneurs, more efficient business models, and better visions for the future. Besides, if we don’t let them fail now, the problem will only get bigger.
The truth is, we live in a world of finite resources, and we need to intelligently allocate our capital, labor, and passion to be as prosperous as possible. How we view money can help: First, we need to go back to sound money, a gold standard, so that money once again serves its paramount role as a store of value. This allows individual merit and hard work to be saved for future use.
Second, we need to disallow our government from choosing favorites through bailouts. National defense or other extreme situations may call for exceptions, but in general, the needs of a country are more easily found where its citizens freely choose to spend their hard-earned money rather than where its various “representatives” think it will get them reelected.
Because money is one side of almost every transaction, we should demand fair and sound money. This would elevate values such as planning and saving for the future, reducing income and wealth inequality, and allocating our cumulative resources for the greatest prosperity.
You can write your “representative,” of course. More importantly, educate yourself on the importance of sound money, and help educate others. The more people who understand how their wealth is stolen through these smoke and mirrors, the louder our collective “no” will be toward the next bailout.
