Sunday, December 21, 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 Salvation Army serves 1,000-plus across 2 days

By Susan Hiland | From Page: A1, 4 Comments | Gallery

 
Blue Christmas service offers reflection, hope

By Amy Maginnis-Honey | From Page: A1

Shining bright for all to see: Locals deck out yards, homes

By Amy Maginnis-Honey | From Page: C1, 1 Comment | Gallery

 
Time for annual Solano County quiz

By Brad Stanhope | From Page: A2

Bevy of holiday activities at Western Railway Museum

By Amy Maginnis-Honey | From Page: A3 | Gallery

 
Discovery Kingdom upgrades animal, marine mammal facilities

By Amy Maginnis-Honey | From Page: A3

State Fair scholarship applications available

By Amy Maginnis-Honey | From Page: A3

 
Get tested, know your status

By Morgan Westfall | From Page: C4

 
Free New Year’s celebration slated

By Amy Maginnis-Honey | From Page: A5

 
 
New development fees start Jan. 1 in Vacaville

By Amy Maginnis-Honey | From Page: A5

A word of warning for Senator Warren

By Bud Stevenson | From Page: B7, 4 Comments

 
New technology chief will join McNaughton Newspapers

By Tanya Perez | From Page: B7 | Gallery

 
Suisun City police log: Dec. 19, 2014

By Susan Hiland | From Page: A9

Fairfield police log: Dec. 19, 2014

By Susan Hiland | From Page: A9

 
Sky-high price has VA rationing hep C drug

By Tom Philpott | From Page: B10

.

US / World

Air Force admits nuke flaws, but will fixes work?

By The Associated Press | From Page: A1

 
AP sources: Cops’ killer angry at chokehold death

By The Associated Press | From Page: A1, 4 Comments

 
Officials: Missing dog was dyed to deceive

By The Associated Press | From Page: A5

Immigrants build document trails to remain in US

By The Associated Press | From Page: A5

 
California officer kills teen after machete attack

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

 
4 teens die in fiery head-on crash in Pennsylvania

By The Associated Press | From Page: A6

2 dozen injured in southern Indiana bus crash

By The Associated Press | From Page: A6

 
Police brutality protesters rally at Mall of America

By The Associated Press | From Page: A6, 1 Comment

Texas ranchers seeking alternative incomes

By The Associated Press | From Page: A7

 
Panama’s Noriega in prison 25 years post-invasion

By The Associated Press | From Page: A10

North Korea proposes joint probe over Sony hacking

By The Associated Press | From Page: A10

 
2 car bombs rock southern Sweden’s city of Malmo

By The Associated Press | From Page: A10

Bombings kill 12 in Iraq

By The Associated Press | From Page: A10

 
US sends 4 Afghans back home from Guantanamo

By The Associated Press | From Page: A10

Burying the dead after Pakistan’s school massacre

By The Associated Press | From Page: A11

 
A chance to breach divide for young in Cuba and US

By The Associated Press | From Page: A12

.

Opinion

Editorial Cartoon: Dec. 21, 2014

By Daily Republic Syndicated Content | From Page: A8, 1 Comment

 
New school finance strategy lacks accountability

By Dan Walters | From Page: A8

Season’s greetings from the Obamas

By Alexandra Petri | From Page: A8

 
Sound off for Dec. 21, 2014

By Daily Republic | From Page: A8

 
.

Living

Today in History: Dec. 21, 2014

By The Associated Press | From Page: A2

 
Vatican offers olive branch to US nuns

By The Associated Press | From Page: C3, 1 Comment

Why celebrate Christmas?

By Noel Reese | From Page: C3, 2 Comments

 
Horoscopes: Dec. 21, 2014

By Holiday Mathis | From Page: C4

Should I ask grandson why we weren’t included in wedding photos?

By Kathy Mitchell and Marcy Sugar | From Page: C4

 
.

Entertainment

Review: ‘Five’ by Ursula Archer is intriguing

By The Associated Press | From Page: C6

 
PUBLISHERS WEEKLY BEST-SELLERS

By The Associated Press | From Page: C6

Publisher hopes to sell books through Twitter

By The Associated Press | From Page: C6

 
Chris Colfer has multi-book deal

By The Associated Press | From Page: C6

Jerry Lee Lewis: Sustained by brief blaze of glory

By The Associated Press | From Page: C6

 
TVGrid

By Daily Republic Syndicated Content | From Page: B11

.

Sports

New Giants 3B McGehee eager to play back home

By The Associated Press | From Page: B1

 
Interim coaching jobs present challenges in bowls

By The Associated Press | From Page: B1

49ers squander 21-point lead in 4th straight loss

By The Associated Press | From Page: B1

 
No. 11 Lady Vols trounce No. 7 Stanford 59-40

By The Associated Press | From Page: B3

Eagles near elimination, fall 27-24 to Redskins

By The Associated Press | From Page: B3

 
Raiders place cornerback Brown on injured reserve

By The Associated Press | From Page: B3

Big moves bring big hope for Chicago baseball

By The Associated Press | From Page: B4

 
US skier Nyman wins Gardena downhill for 3rd time

By The Associated Press | From Page: B4

Vonn wins women’s World Cup downhill in France

By The Associated Press | From Page: B4

 
This date in sports history for Sunday, Dec. 21, 2014

By The Associated Press | From Page: B5

 
.

Business

Your info has been hacked. Now what do you do?

By The Associated Press | From Page: B7

 
On the money: 4 ways to hold on to your cash when renting a car

By The Associated Press | From Page: B7

 
Recalls this week: Bean bag chairs, toy monkeys

By The Associated Press | From Page: B8

 
Scarecrows outnumber people in dying Japan town

By The Associated Press | From Page: B12

.

Obituaries

Marian Kay Zutz

By Nancy Green | From Page: A4

 
Bart Ferro

By Nancy Green | From Page: A4

Dominic C. Scolaro

By Nancy Green | From Page: A4

 
Barbara Jean Bidstrup Braker

By Nancy Green | From Page: A4

Perry Michael Smetts

By Nancy Green | From Page: A4

 
Luzdivina B. Banks

By Susan Hiland | From Page: A4

Arnold Howard Evans

By Susan Hiland | From Page: A4

 
Anthony Hanson Elder

By Susan Hiland | From Page: A4

.

Comics