The United States Should Abolish the Federal Reserve

Rebuttal 1: Pro spends most of the contention discussing the history of the Fed. It’s mostly irrelevant today and therefore pointless to the debate, but I will address it since it’s extremely misleading and a lot of his statements have no actual proof. Plus, I’ll address the Fed’s oversight. Pro says the Fed was created to be “lender of last resort”. I agree with this statement. Pro then says, “If a bank faced bankruptcy it had nowhere to turn so its lending practices had to be responsible.” The problem is, they weren’t even close to being responsible. There were 8 banking crises in the US in the time period between the end of the 2nd Bank of the United States and the creation of the Fed (77 years), which almost always led to recessions. (1) In fact, half of the banks at the time failed and commercial banks lasted on average about 5 years. (2) This would have hurt the people, just as much as the banks as they were the ones putting their money into these banks. One of the reasons recessions at the time were frequent and brutal. Pro also doesn’t seem to realize that having banks lend money to people (likely to pay it back, hence bank regulation) helps everyone. The banks get to collect interest on the debt, while the people lending money get to purchase houses, college education, etc. when they often otherwise would be unable to do so. However, if everyone is charging the banks demanding gold, banks won’t be able to do anything. Then everyone loses their money, because the bank closes. Of course, some regulation is important, but severely lacking a bank’s ability to lend hurts everyone. Pro then talks about the meeting at Jekyll Island as if it’s suppose to be some sort of proof of his case. It’s not, he makes up his own conclusions that these men acted in this matter due to corruption, with no actual proof. In reality, it was because of they realized how bad the banking crises had been for the economy, specifically the Panic of 1907 and its following recession. (3) Before I address the actual point of the contention I’d like to address Pro talking about where Timothy Geithner and Ben Bernanke work now. This doesn’t matter, but it’s worth pointing out. Their expertise is in economics and finance, obviously they’re going to work in a related field. Now, the actual point of the contention, the power of the Fed and its lack of oversight. The Fed does act independently for the most part, because they want the Fed to avoid political pressures. (4) However, the Fed is still controlled by the government. The Fed was started by Congress, and Congress can amend its charter if they see fit. (5, 8) This is why bills like the Federal Reserve Transparency Act are introduced to Congress (the Senate just has no interest in passing it). (7) Plus, the Senate and the President select the chairman, vice chairman, and some of the board of governors. (6)Rebuttal 2: I’d like to remind voters that I don’t have to defend every action the Fed had ever done, if I can show a reason it should be maintained. This fact essentially makes Con’s 2nd argument worthless, and if anything just strengthens my 2nd argument. Pro’s argument essentially boils down to the fact that low interest rates are harmful because they create bubbles. He critiques the Fed helping to start the housing bubble, which was a major cause of the Great Recession. And yes, interest rates were low for much of the decade, when they really should have been higher. However, as I mentioned in my 2nd argument, the banks weren’t being regulated enough either, which would have been a much bigger factor. Pro admits, “banks lent money to any person for the purpose of buying houses”. Obviously, this means people who the banks should have assumed weren’t going to pay it back would have been receiving bank loans. These people would have been the main causes of the housing bubble, because obviously they’re the ones who would have put banks in trouble by not repaying their loans. All that does is strengthen my argument about the Fed’s role in regulating the banks. Plus, the government itself also was a huge factor in getting more people to buy homes, primarily started through polices due to Bill Clinton’s “everyone deserves a house” rhetoric. (9) Then some of the blame also has to go to Fannie Mae and Freddie Mac, who were suppose to prevent an event like the Housing Bubble from occurring. (10) Clearly, it’s absolutely ridiculous to try and put the blame for the housing bubble on the low interest rates alone, which was really a minor factor overshadowed by government policies and most of all unregulated banks, making the Fed seem more important. Also, even if we accept Pro’s argument that low interest rates were a large part of the housing bubble, it still doesn’t matter one bit, for the purpose of the debate. I’ve already shown numerous times in the previous round how the Fed has managed interest rates effectively and proven that they need to be able to do that. Like I mentioned, I don’t need to justify everything the Fed has ever done. If there’s a bad president, we don’t abolish the presidency.Rebuttal 3: Pro begins this contention by saying we shouldn’t be using paper money. He fails to offer any alternative, however, so it already severely hurts his argument. He explains that the Fed’s ability to produce money is counterfeit. He also tries to account inflation to theft, which are both ridiculous as I’ll explain. Pro tries to say the ability to print money is counterfeit, his reasoning being, “The fact that this organization which is not technically a government organization has a printing press is tantamount to counterfeiting”. It’s almost as if he was saying, if he considered the Fed a government organization then it’d be fine. It just so happens the Fed is a government organization, just as independence to operate. (5, 8) That pretty much defeats this part of the argument. Now the actual point of the contention (which links to the other arguments he made) is that the Fed devalues the US dollar. It is true that typically the Fed targets the inflation rate to be about 2% per year. Personally, I think it should be about 1%, but it makes sense to keep an inflation rate. It makes sense when you consider how bad deflation is. Many of the US’s worst economic meltdowns were deflationary periods, such as the Panic of 1837, the Long Depression, and the Great Depression. (11) The Great Recession could have been that way as well (and become much worse) had the Fed not stepped in, but I’ll get back to that. One of the main problems with deflation is the deflationary spiral: It’s quite simple to understand. If everyone’s dollar’s are worth more, things cost less. In turn, less money is coming into companies, they can have less workers, less workers means less purchases, there is more supply than demand, and the cycle continues. This isn’t the only problem with deflation, however. If the value of the dollar increases, than so do people’s debt. This hurts the lower and middle classes the most, as pretty much all Americans need debt for houses, cars, and education. (12) However, I’m not making this up, this has occurred many times throughout history (like I mentioned earlier it ran rampant in some of the US’s worse economic downturns). This also happened in Japan in the 90s, commonly known as the “Lost Decade” for the Japanese economy. Deflation had hit the Japanese and the deflationary spiral started, and Japanese banks suffered greatly. (13) The horrors associated with deflation began occurring in the US, in 2008 as mentioned earlier. (14) If we look at Pro’s chart we can see at the time of recessions the amount of dollars increased dramatically. That was due to the Fed enacting quantitative easing, which had been done before in Japan. As I’m sure everyone knows, prices didn’t shoot up dramatically like that, but why not? Investopedia writer Adam Hayes, explains it like this (14): “The monetary base, or M0, is what most people think about when it comes to the amount of money in circulation, but banks are in the business of making loans with the deposits on hand. The money from those loans are then deposited back into the banking system and re-loaned, over and over again. This is the so-called money multiplier effect. If the multiplier is 10x, for every $100 deposited into a bank up to $1,000 of new credit money is created through this mechanism. The M2 measure of the money supply, which includes the effects of fractional reserve banking and credit, was actually quite stable during this period.” Here is the graph Hayes is referring to, which you can see was indeed much more stable: Most of the money the banks actually used was to fix their balance sheets and much of that money is going back to the Fed. (14) That’s a much different story than Pro painted saying, “This is troubling because the majority of this money is sitting in bank vaults waiting to be lent out.“ Finally, I will address Pro’s concerns regarding the dollar losing 96% of its value. That may seem like a huge deal, but there a few problems with that. First of all, most people don’t just keep paper money, they put it in a bank where it can collect interest (which prior to the Recession would have often seen rates above 2% inflation), many put it in the stock market through 401ks which often grow faster than inflation, or they could even buy gold if they wanted. Plus, wages have also kept and surpassed inflation since 1913, per purchasing power. (15) This pretty much defeats Pro’s whole argument.Sources: 1-https://en.wikipedia.org... 2-http://bit.ly... 3-http://wapo.st... 4-http://www.federalreserve.gov... 5-https://www.udel.edu... 6-http://bit.ly... 7-http://bit.ly... 8-http://1.usa.gov... 9-http://buswk.co... 10-http://bit.ly... 11-http://bit.ly... 12-http://bit.ly... 13-http://bit.ly... 14-http://bit.ly...