The United States Should Abolish the Federal Reserve

Preface:My burden in the debate is to defend that the Federal Reserve (Fed) should not be abolished. This does not mean that I have to defend everything the Fed has ever and/or currently does, so long as I can show the US should keep the Fed, even if it is for only 1 policy. My arguments will essentially boil down to the fact that the economy would be worse off without the Fed, and therefore it should be maintained. Interest Rates: One of the Fed’s primary roles is to set the interest rates. (1) Lowering the interest rates is typically done to bring growth into a sluggish economy, while raising interest rates is typically done to fight inflation in a rapidly growing economy, so the economy won’t overheat. (1) The reason lower interest rates stimulate growth is simply because there will be more money around and everything will be cheaper. Of course, excess inflation is also bad because things might get too expensive as well. Both lowering and raising interest rates, when conducted properly, will in the long run help the economy more than the absence of them. Many Americans may recall the economic booms that existed throughout most of the 1980s and 1990s. What not everyone may remember is that both booms were preceded by recessions, “the Early 1980s Recession” and “the Early 1990s Recession”, respectively, which lasted 16 and 8 months, respectively. (2) Although there were many factors, it is generally agreed that one of the most important reasons the 80s recession was put to an end, was because the Fed lowered the rates, which then allowed continuous growth throughout most of the decade. (3, 4) In contrast, although the 90s recession was short, an economic boom did not occur immediately after and unemployment remained high. (5) Clearly, the economy needed more stimulation for rapid growth to occur. For this reason, the Fed kept lowering the Federal Funds Rate after the recession ended in early 1991 and didn’t stop dropping them until the end of 1992. (6) Sure enough, the 90s economic boom proceeded. One may argue that the Fed dropping the interest rates was insignificant in both these booms. However, we can observe situations made much worse due to a central bank’s inability to have much effect on the interest rates. For example, most countries use to back their currencies with gold, meaning the value of the currency was tied to the price of gold, which in turn means a central bank would have trouble changing the interest rates. (8) Everyone knows that for much of the world, including the US, the 1930s marked the worst economic downturn in history, the Great Depression. However, did it need to drag on for as long as it did or be nearly as severe as it was? The answer to that is no. This is based off the fact that many countries which didn’t use or quickly abandoned the gold standard, did not suffer the effects of the Depression, at least not to the magnitude countries like the US did. (8) Of course, as explained above sometimes the central bank needs to raise the interest rates. The 90s economic boom was obviously never going to last forever, so as a result the Fed began raising the interest rates in 1999. (6) Naturally, economic growth slowed down as the rates were raised, but not significantly. (7) Unfortunately, following the 9/11 attacks the situation got much worse, and a recession did occur anyways, but even so it was a brief and mild recession because the Fed took the necessary action to raise the rates. (7) Another time the Fed showed the importance of being able to raise interest rates was when it ended the inflation that ran rampant throughout the 1970s. (9) The Fed then raised interest rates to artificially, unusually high levels in the early 1980s. (6) Although it did help cause a recession (mentioned above), it was necessary to respond to the inflation of the 70s and overall was brief and allowed inflation to stay low throughout most of the 80s growth. (4) Overall, it is clear that the Fed’s ability to change the interest rates is needed for a strong economy, so it can stimulate sluggish growth or cool down rapid growth or inflation. Bank Regulation: Another important role of the Federal Reserve is to supervise and regulate banks. The Fed does this in many ways, such as requiring a set reserve amount and making sure that banks have adequate capital, safe assets, good management, earnings, liquidity, and how they make decisions, via “stress tests”. (10) Unfortunately, the Fed didn’t start stress tests until after the 2007-08 Financial Crisis. The lack of regulation in this period was one of the main causes of it, because banks were giving out so many bad loans, which were unlikely to be paid back. (11) It got so bad, that many major banks such as the Bank of American needed to be bailed out, the whole housing and stock markets crashed, and the US fell into its worst economic period since the Great Depression. In contrast to this (and the situation in the rest of the G7), Canada saw none of its major banks fail and it was hit less severely by the recession. The main reason was because Canadian banks were much better regulated than American banks. (12, 13) Therefore, had the Fed been regulating banks like it does now throughout the 00s, the whole Financial Crisis likely would have been avoided or a lot less severe. Sources: 1-http://money.howstuffworks.com... 2-https://en.wikipedia.org... 3-http://bancroft.berkeley.edu... 4-http://www.nytimes.com... 5-http://bancroft.berkeley.edu... 6-http://www.newyorkfed.org... 7-http://www.nber.org... 8-http://www.bradford-delong.com... 9- http://www.investopedia.com... 10- 11-http://www.economist.com... 12-http://www.forbes.com... 13-http://www.ft.com...