The upcoming confirmation hearings for Janet Yellen, President Obama’s appointee to chair the Federal Reserve, are sure to garner a lot of attention. But in many ways, Yellen herself is largely beside the point. There will likely be nothing unique about her tenure.
It would be more useful to examine the Federal Reserve System itself.
Although the big banks and mercantilist politicians had been agitating for a new central bank ever since Andrew Jackson vetoed the rechartering of the Second Bank of the United States in 1832, the modern Fed was the result of a 1910 meeting of some the world’s richest and most powerful men.
Held at the exclusive Jekyll Island Club off the coast of Southern Georgia, the meeting was kept secret due to Americans’ distrust of monopolies. For the attendees, this distrust certainly required secrecy, because a monopoly is essentially what the Federal Reserve Act created. While the conspirators claimed that they were doing humanity a great service, this being the Progressive Era, after all, technocratic central planning was all the rage, as Adam Smith noted, “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”
The Federal Reserve System consolidated the banking sector, eliminating competition within that portion of the economy. Since its creation, the Fed has habitually encouraged risky behavior, rewarded incompetent management, and bailed out millionaires at the expense of the American taxpayer.
Failure is a necessary component of a market economy. A business generally fails for one of two reasons. First, the venture simply may not be workable. In this case, government intervention is an abject waste of taxpayer money. The money ends up going down a rat hole.
Or, secondly, the Fed has long bailed out incompetent business managers at the taxpayers’ expense. Inept management can cause a business to fail. In this case, better managers are able to buy the company’s viable assets at bargain prices, putting them back to useful and profitable purposes. For instance, if General Motors had been allowed to collapse in 2009, its factories and other facilities would not have just vanished. Most likely, another automobile manufacturer would have bought them and made cars at cheaper prices than GM could.
When the government props up incompetent management, these productive resources stay in the hands of bungling administrators. Even worse, it sends the message to executives and managers at other companies that the government will rescue them so long as they are “too big to fail.” Thus, moral hazard is promoted throughout the entire system.
During the 2007-2008 financial crisis, we were warned that the world would end if the Fed did not take drastic measures to backstop the banking system. The Fed ended up loaning out trillions of dollars to its chosen institutions, while other companies were allowed to fail. Of course, the average American got none of the Fed’s largesse.
Consequently, the “Too Big To Fails” are now bigger than ever, while simultaneously the world’s financial system is on perhaps even more shaky ground than it was before the crisis.
If, on the other hand, the Fed and the federal government had allowed the market to work — that is, to purge itself of all the bad investments and inept businesses — the world would not have come to an end. Yes, there would have been a lot of suffering, but, once the market reached firm ground, we would have witnessed a remarkable recovery.
Instead, the Fed has created a zombie economy that lurches along solely because the Fed continues to pump vast amounts of money into the economy through its quantitative easing (QE) programs. We are now seeing “QE to infinity” as the central bank injects $85 billion a month into the system with no declared end date to the program.
The economy is so addicted to the Fed’s easy money that even rumors of QE tapering send shockwaves through the markets.
Just as the meeting at Jekyll Island was veiled in secrecy, so are the current operations of the Federal Reserve. Congress is statutorily prohibited from subjecting the Fed to a full audit. As a result, the Fed acts as a kind of shadow government in many ways. Some have suggested that we audit the Federal Reserve. This is not only necessary, but long overdue.
Instead of concentrating on Janet Yellen, the Senate should expose the Fed itself to the scrutiny that our central bank has avoided since its inception. Instead of simply questioning Ms. Yellen, we should question the stability, and perhaps the validity, of this damaging institution.