Fed intent on stopping growth

It’s time to privatize or federalize the functions of the Federal Reserve Bank. Dollars should be issued by the Treasury, if we continue to use fiat money, and interest rates ought to be set by the free market.

Bloomberg.com: Top Worldwide

Federal Reserve policy makers may be willing to sacrifice economic growth if that helps them keep inflation under control as energy prices soar, economists said after reading the central bank’s latest statement.

“This is not a policy of indifference,” said David Resler, chief economist at Nomura Securities International in New York. “This is a policy of additional restraint…”

This isn’t even a policy of restraint. It’s a policy of contraction. Record keeping and statistics are good enough that a group of bright guys like Alan Greenspan are more than capable of seeing that they are doing precisely what they did in 2000. They are engineering a contraction. (I’ll refrain from calling it a recession, because technically the non-consecutive quarters of declining GDP in 2000 and 2001 didn’t meet the definition of recession but they certainly went past “soft landing”.) This isn’t a matter of sticking your finger in the air to see which way the wind is blowing. The indicators have lined up in place and they all say the same thing – 3.5% is a neutral to slightly contractionary interest rate, 4% is contractionary.

Perhaps it’s an old man’s nostalgia for a simpler time, but for whatever reason, Greenspan and Company are committed to maintaining business cycles in a robust, diversified, technology and information rich economy that wouldn’t have serious economy wide cycles anymore except for Fed tampering.

They set out to pop a perceived asset bubble in the late 90s, that arguably was deflating pretty quickly on its own. Then after overdoing it and causing economic havoc in one direction, they pumped too much money into the economy during the last downturn, taking real interest rates into uncharted territory below 0%. Now they are intentionally overcompensating the other direction. I feel a bit as if I’m living Atlas Shrugged (a novel I would have expected Alan Greenspan to be familiar with) or observing a policy laid out with Road to Serfdom as its model.

Business cycle downturns historically were triggered by negative events that both shocked and surprised economy’s that were smaller, less diversified and less productive. The kinds of events that produced panics in the 1800s would be miniscule in the scope of the 21st century American economy. Droughts, famines, even (hard as it may be to believe) earthquakes and hurricanes are regional events that can’t take down our whole economy. Even rebuilding the Gulf Coast at twice the reasonable cost as President Bush proposes only accounts for about four-tenths of one percent of GDP over the timespan involved. Certainly a Congress stupid enough to pass a Smoot-Hawley style tariff or a large tax increase could cause a collapse. The collapse of the banking system, which is unlikely with deposit insurance, could do the same. But currently the only economic actor with that kind of clout, and the willingness to use it, in the economy is the Federal Reserve. There is simply no other single factor whose ripples can be felt so readily and so predictably across all sectors of the US and world economy. If there is a recession or inflation, the blame absolutely and without fail belongs with one institution – the Federal Reserve Bank.

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