Ron Paul Was Right: The Case Against the Fed
It happened again. After hinting at an increase in the interest rate, the Federal Reserve has once again rejected pursuing said action. The claims that a rate hike was imminent has been occurring for a while, but not much has came of it.
The leaders of the Federal Reserve justify their refusal to raise rates by saying “it’s complicated.” It seems like the Federal Reserve is looking for any excuse to avoid confronting the upcoming issues in our economy and ensuring future economic health.
This sets a dangerous precedent. There are valid concerns about how raising interest rates could harm the economy but the damage would ultimately be short-term. Keeping rates low, on the other hand, leaves the door open for negative interest rates to be implemented in the event of another economic downturn.
Negative interest rates would devastate savings and ultimately impair the long-term health of economy. While the consequences of raising rates may be unpleasant, the longer the Federal Reserve delays in raising rates, the greater the risk is of the Fed resorting to negative interest rates and all the harmful effects on savings and growth that come with it. Ultimately, though, the Federal Reserve remains unlikely to raise rates thanks to the short-term harm raising rates will cause. Ultimately, the whole situation is fundamentally the result of the Fed’s efforts to ensure interest rates stay low.
Artificially lowering the interest rate is attractive for the short-run prosperity it creates, but it doesn’t allow for long-term prosperity. Ultimately, the Federal Reserve is incentivized to make popular-but-unwise decisions that threaten the country in the long term.
his isn’t the only error the Federal Reserve has made. The Federal Reserve has also engaged in continued inflation of the US dollar for over a century. Since it was founded, the US dollar has lost 96% of its value. Ironically, the Fed was justified in part as protecting the value of the dollar. Instead, it has been devaluing the dollar.
It ensures that the cost of living continues to go up. This inflation effectively acts as a hidden tax that disproportionately harms the poorest of society — it makes it so their money continues to decline in value year after year. Printing more money may make everyone nominally richer, which is why it is so attractive to the central bank for it to engage in, but it in the long run drives up costs of living and harms everyone.
It is little wonder that Nobel Prize winning economist Milton Friedman argued that controlling inflation is more important than controlling unemployment: unemployment is a problem, but it fundamentally is a short-run problem, whereas inflation is difficult to reverse, especially with a fiat currency.
The Federal Reserve’s policy of artificially lowering interest rates and engineering inflation to stimulate economic growth is becoming obviously problematic. This isn’t even getting into the role central banks like the Federal Reserve play in exacerbating the business cycle. In essence, the Federal Reserve lowers interest rates and helps create an artificial boom.
The boom sees credit expanded and pumped into various sectors-housing, Wall Street, etc. This credit ultimately expands too far, creating mass borrowing from the banking system and results in widespread malinvestment. Finally the bubble bursts as the market attempts to correct itself and the economy enters a recession.
This has happened multiple times and helped cause both the Great Recession and Great Depression. Overall, the Federal Reserve has shown itself time and again to be failing at its stated mission of controlling the ups and downs of the business cycle. Instead, it has become the tool by which economic crises are sparked, often by the efforts originally undertaken as an attempt to prevent them.
Taking all of the above into account, it’s hard to argue that Ron Paul and those who echo him on monetary policy weren’t onto something when they criticized the Federal Reserve’s existence and control over monetary policy. The bank contributed to the worst economic crises in our history and now stands poised to spark another one. It is hard to argue the Federal Reserve deserves to exist given all of this.
However, abolition of the Federal Reserve is an unlikely outcome thanks to how deeply entrenched it is and the general perception that civilized nations require a central bank to survive (though this is disputable.)
Nevertheless, taking into account the sheer difficulty of abolition, steps in that direction are what need to be called for. Subjecting the Federal Reserve to an annual Congressional audit is an idea supported across the political spectrum. This audit would keep the Federal Reserve accountable and allow for a better monetary policy. For now, this is what those who are concerned about the health of our economy should be fighting for.
Follow this author at @mitchellastern