There is a growing consensus that the Federal Reserve is broken - because it is. The Fed was established to provide price stability and prevent periodic banking crises. It has accomplished neither.The wholesale price level in the United States was at almost the same level when the Fed was established in 1913 as it was in 1793, 120 years earlier. Now it takes about 22 dollars to equal the 1913 dollar. There have been far more bank failures post-Fed than pre-Fed, and we seem to be in an almost permanent state of banking crises with “too big to fail.”The Fed’s near-zero interest policy is a growing disaster. With inflation near 4 percent and interest on various types of savings accounts less than 1 percent, those who have been prudent and saved are being punished - forced to accept what is, in effect, a negative rate of interest. Credit is no longer being allocated by the market but to classesof borrowers as determined by politicians. Homeowners are being given money at a near-zero rate (the interest rate they are being charged is about equal to inflation) and the interest expense is tax-deductible. Many small-business people are not able to get loans because they are “risky,” and the banks can borrow from the Fed at lower rates than they can get on government bonds, so there is no incentive for them to take on the risk. Unless the banks become more willing to lend to businesses that create real jobs and innovations, the economy will continue to stagnate.
RAHN: Fixing the Federal Reserve - Washington Times
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