Friday, October 24, 2014
FAIRFIELD-SUISUN, CALIFORNIA
99 CENTS

Prophets and losses: History of the Fed

sowell column sig

By
From page A9 | February 10, 2013 |

Now that the federal government is playing an ever larger role in the economy, a look at Washington’s track record seems to be long overdue.

The recent release of the Federal Reserve Board’s transcripts of its deliberations back in 2007 shows that their economic prophecies were way off. How much faith should we put in their prophecies today – or the policies based on those prophecies?

Even after the housing market began its collapse in 2006, Federal Reserve Chairman Ben Bernanke said in 2007, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”

It turned out that financial disasters in the housing market were not “contained,” but spread out to affect the whole American economy and economies overseas. Then Chairman Bernanke said: “It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth.”

What is an even more interesting question is why we should put such faith and such power in the hands of a man and an institution that have been so wrong before.

This is not just a question of a bad guess by Ben Bernanke. The previous chairman of the Federal Reserve System, Alan Greenspan, likewise misjudged the consequences of the housing boom and bust. Nor was the Federal Reserve’s staff any more accurate in its prophecies. According to The New York Times, “The Fed’s own staff still forecast that the economy would avoid a recession.”

Today, the economy has not yet fully recovered from the recession that the Federal Reserve System’s staff and chairmen thought we would avoid.

We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System – or the seemingly boundless confidence that Fed Chairman Ben Bernanke still shows as he intervenes in the economy on a massive scale.

Not only does the Federal Reserve System control the money supply and regulate banks, the Fed’s willingness to keep buying hundreds of billions of dollars’ worth of government bonds makes it easier for the Obama administration to keep engaging in massive deficit spending that runs up a record-breaking national debt.

The reason that the Federal Reserve can afford to continue buying huge amounts of government bonds is that the Fed is authorized to create its own money out of thin air. They use the fancy term “quantitative easing,” instead of saying in plain English that they are essentially just printing more money.

Being wrong is nothing new for the Federal Reserve System. Since this year is the 100th anniversary of the Fed’s founding, it may be worth looking back at its history.

President Woodrow Wilson explained the reasons for creating the Federal Reserve System. He said that the Federal Reserve “provides a currency which expands as it is needed and contracts when it is not needed” and that “the power to direct this system of credits is put into the hands of a public board of disinterested officers of the Government itself” to avoid control by private bankers or other special interests.

The Federal Reserve was supposed to prevent shocks to the economy that can come from drastic inflation or deflation, and reduce the dangers that can come from widespread bank failures. These are all good goals. But what is the Fed’s track record?

In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded. The biggest deflation in the history of the country came after the Fed was founded, and that deflation contributed to the Great Depression of the 1930s. As for bank failures, they reached levels unheard of before there was a Federal Reserve System.

Like so many “progressives,” then and now, Woodrow Wilson seemed to think that, if those who made government decisions had no financial interest in those decisions, then they could be trusted to wield their powers in the public interest.

But the enormous power wielded by the unelected leaders of the Fed over the economy, unchecked by the constraints of the market, has repeatedly turned out to be more than human beings can handle.

Thomas Sowell is an author, economist and senior fellow at the Hoover Institution, Stanford University.

LEAVE A COMMENT

Discussion | No comments

The Daily Republic does not necessarily condone the comments here, nor does it review every post. Read our full policy

.

Solano News

 
 
‘The Rocky Horror Show’ finds a home on stage

By Amy Maginnis-Honey | From Page: B1

For sale: Solano home with Nike missile bunkers

By Ian Thompson | From Page: A1, 7 Comments | Gallery

 
 
 
Salvation Army debuts giant kettle for holidays campaign

By Robinson Kuntz | From Page: A3 | Gallery

Suisun City police log: Oct. 22, 2014

By Susan Hiland | From Page: A12

 
Fairfield police log: Oct. 22, 2014

By Susan Hiland | From Page: A12

.

US / World

New survey details vast scope of teen dating abuse

By The Associated Press | From Page: A1, 2 Comments

 
Boosters seek to keep Bay Bridge light display

By The Associated Press | From Page: A3 | Gallery

Brown opens up spending in campaign’s final month

By The Associated Press | From Page: A4

 
Driver attacked after ice cream truck kills boy

By The Associated Press | From Page: A4, 8 Comments | Gallery

$50,000 reward to find killer of Anaheim girl, 9

By The Associated Press | From Page: A4, 1 Comment

 
Video shows bikers taunting California officer

By The Associated Press | From Page: A4, 5 Comments

California man guilty in wife’s stabbing death

By The Associated Press | From Page: A4

 
US tech firm fined for underpaying Indian workers

By The Associated Press | From Page: A5, 1 Comment

Suspect in girl’s 1984 killing was police employee

By The Associated Press | From Page: A5

 
PTSD argued in case of Marine jailed in Mexico

By The Associated Press | From Page: A5, 7 Comments | Gallery

Paintings in national parks spark probe, furor

By The Associated Press | From Page: A6

 
For teen with passport, Syria trip can be seamless

By The Associated Press | From Page: A7

Border deaths drop to 15-year low

By The Associated Press | From Page: A7, 3 Comments

 
Prisoner in Afghanistan to be tried in US

By The Associated Press | From Page: A7

US, SKorea agree to delay wartime control transfer

By The Associated Press | From Page: A7

 
US officials: Iraqi army regrouping slowly

By The Associated Press | From Page: A7, 1 Comment

Gary killings put spotlight on abandoned buildings

By The Associated Press | From Page: A7

 
Lawmakers seek to end benefits to former Nazis

By The Associated Press | From Page: A7, 1 Comment

NK experts: US must apologize to free detainees

By The Associated Press | From Page: A10

 
Ebola: A crash course in fear and how it hurts us

By The Associated Press | From Page: A10, 4 Comments

Cremation fears leave empty Ebola beds in Liberia

By The Associated Press | From Page: A10 | Gallery

 
Ex-Mountie hero of shooting at Canada’s Parliament

By The Associated Press | From Page: A10

Canada gunman wanted a passport to go to Mideast

By The Associated Press | From Page: A10

 
NYC mayor: Don’t be alarmed by doctor’s Ebola

By The Associated Press | From Page: A10

NY doctor back from Guinea has Ebola, 1st in city

By The Associated Press | From Page: A12, 1 Comment

 
.

Opinion

 
Planning Commission not listening to the people

By Letter to the Editor | From Page: A11, 14 Comments

Not sure I trust government on Ebola

By Letter to the Editor | From Page: A11, 9 Comments

 
Is America prepared for Ebola or is threat overhyped?

By Ben Boychuk and Joel Mathis | From Page: A11

.

Living

Community Calendar: Oct. 24, 2014

By Susan Hiland | From Page: A2

 
Today in History: Oct. 24, 2014

By The Associated Press | From Page: A2

 
Horoscopes: Oct. 24, 2014

By Holiday Mathis | From Page: A9

.

Entertainment

Week in preview Oct. 24-30, 2014

By Amy Maginnis-Honey | From Page: B1

 
Review: ‘John Wick’ delivers non-stop action

By The Associated Press | From Page: B2

 
Entertainment calendar Oct. 24, 2014

By Susan Hiland | From Page: B4

 
Burns’ series gives PBS a ratings milestone

By The Associated Press | From Page: B5

Q&A: Mick Jagger, the film producer, heads to work

By The Associated Press | From Page: B6, 1 Comment

 
TVGrid

By Daily Republic Syndicated Content | From Page: B6

.

Sports

 
At 1-all, World Series moves to quirky Giants park

By The Associated Press | From Page: B7

Giants’ Hudson to face Royals’ Guthrie in Game 3

By The Associated Press | From Page: B7 | Gallery

 
College notebook: Cordes chosen to try out for USA national team

By Paul Farmer | From Page: B7 | Gallery

Homecoming still on but no game for VCS

By Daily Republic staff | From Page: B8

 
Compton among PGA leaders at Sea Island

By The Associated Press | From Page: B8

Steve Nash ruled out for season with back injury

By The Associated Press | From Page: B8

 
Judge questions $75M NCAA concussion settlement

By The Associated Press | From Page: B8

Arizona men near-unanimous pick by media to win Pac-12

By The Associated Press | From Page: B8

 
Raiders may lose Woodley to biceps injury

By The Associated Press | From Page: B8 | Gallery

No. 6 Oregon looks to extend streak against Cal

By The Associated Press | From Page: B8

 
The Write Way: KC coach’s lineup cards are artful

By The Associated Press | From Page: B8 | Gallery

Prep football capsules: Week 8

By Paul Farmer | From Page: B9

 
Manning, Sanders lead Broncos past Chargers, 35-21

By The Associated Press | From Page: B9 | Gallery

Sports on TV/Local sports for Friday, Oct. 24, 2014

By Paul Farmer | From Page: B10

 
This date in sports history for Friday, Oct. 24, 2014

By The Associated Press | From Page: B10

.

Business

Honda Fit becomes even more intriguing small car

By Ann M. Job | From Page: C1 | Gallery

 
Letting your car find a spot and park itself

By The Associated Press | From Page: C2, 1 Comment | Gallery

Zuckerberg speaks Chinese, Beijing students cheer

By The Associated Press | From Page: B11 | Gallery

 
Cloud business lifts Microsoft’s quarterly results

By The Associated Press | From Page: B11

A blue Christmas for Amazon?

By The Associated Press | From Page: B11

 
.

Obituaries

.

Comics

Get Fuzzy

By Daily Republic Syndicated Content | From Page: A8

 
Rose is Rose

By Daily Republic Syndicated Content | From Page: A8

Wizard of Id

By Daily Republic Syndicated Content | From Page: A8

 
Dilbert

By Daily Republic Syndicated Content | From Page: A8

Zits

By Daily Republic Syndicated Content | From Page: A8

 
Sally Forth

By Daily Republic Syndicated Content | From Page: A8

Baby Blues

By Daily Republic Syndicated Content | From Page: A8

 
Beetle Bailey

By Daily Republic Syndicated Content | From Page: A8

Frank and Ernest

By Daily Republic | From Page: A8

 
For Better or Worse

By Daily Republic Syndicated Content | From Page: A8

Garfield

By Daily Republic Syndicated Content | From Page: A8

 
Pickles

By Daily Republic Syndicated Content | From Page: A8

B.C.

By Daily Republic Syndicated Content | From Page: A8

 
Peanuts

By Daily Republic Syndicated Content | From Page: A8

Baldo

By Daily Republic Syndicated Content | From Page: A8

 
Blondie

By Daily Republic Syndicated Content | From Page: A8

Crossword

By Daily Republic Syndicated Content | From Page: A9

 
Cryptoquote

By Daily Republic Syndicated Content | From Page: A9

Bridge

By Daily Republic Syndicated Content | From Page: A9

 
Sudoku

By Daily Republic Syndicated Content | From Page: A9

Word Sleuth

By Daily Republic Syndicated Content | From Page: A9