In support of Ron Paul libertarian’s notion that the Federal Reserve should be disbanded, evidence comes from (of all places) the Associated Press. Federal financial schemes frequently fool the general public with the misguided assumption that they can be run by people smarter than the rest of us.
It’s puzzling that we allow this urban myth to perpetuate regarding any government agency. Time and again we discover that “experts” don’t live up to expectations as public functionaries—one fallacious premise of statist support for government-inspired solutions to economic problems.
An AP article published in the Wilmington StarNews Business section (Jan. 19, 1013) reported that Federal Reserve policy meeting transcripts show that officials in 2007 “badly underestimated the scope of the approaching financial crisis and how it would tip the U. S. economy into the deepest recession since the Great Depression.” These wise guys were focused on the risk of inflation while our economy fell precipitously. (The New York Times also had something to report on this.) (link)
They fiddled with interest rates and credit while bad bank loans “soured,” the housing market plummeted, and banks and hedge fund investors were stuck with “worthless assets.”
In late October 2007, Janet Yellen, president of the San Francisco Fed wasn’t alarmed, though she noted that “the economy faces increased risks.”
Fed Chairman, Ben Bernanke, mentioned that housing was “very weak,” and manufacturing was slowing down, but he expressed optimism that there was “a good bit of momentum in the economy.”
At the same meeting in October, Obama’s Treasury secretary, Tim Geithner,—then president of the Federal Reserve Bank of New York—thought that the financial markets were “reassuring.” Five years after the economy sank into deep recession, these smarter-than-the-rest-of-us had no comments about it.
However, they weren’t the only miscalculators. Many other regulators, economists, analysts and agency operatives that gave the mortgage debt “high ratings” missed this boat of evidence—including the fact that in July and August 2007 “employers cut jobs for the first time in four years”—that carried us into the “housing meltdown” and “financial crisis,” according to AP investigations.
Early in August 2007, Fed wizards were still in denial of what was happening. They issued a statement that threats to economic growth “had only increased somewhat.” Some officials believed the biggest threat was inflation that had been “mild,” according to the AP.
A few days later, France’s largest bank froze three funds that invested in the U. S. mortgage market. This “escalated fears in global markets.”
Finally, after “emergency conference calls,” the Fed pumped $19 billion into financial markets, cut its discounted rate to banks for emergency loans, and cut its short-term interest for the first time in four years—and two more times in 2007.
It’s not clear whether the Fed could have done anything to avert the financial crisis—which leads one to question its existence—but it is obvious that these people are not to be relied on for understanding about or solutions for economic problems.