The United States Should Abolish the Federal Reserve

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. - F.A. Hayek The Pretense of KnowledgeCon made many arguments for keeping the Federal Reserve. There are many flaws in these arguments, some of them arising from ignoring the problems that the Fed causes and only talking about supposed solutions. He spent much of his argument touching on two recessions, the recession in the 1980s and the recession in the 1990s. Note, he does not talk about the recessions themselves only the booms that followed. First let's look at how this ignoring of the role of the Fed in creating these recessions was passed over, even in his sources. 1. For his citation #3 he provides a link to UC Berkley's Bancroft Library. In the summary for this very source it says the following: "Between 1980 and 1982 the U.S. economy experienced a deep recession, the primary cause of which was the disinflationary monetary policy adopted by the Federal Reserve."[1] Nothing to see here, move along. We can't talk about only the good things that the Fed does and ignore the bad. My opponent speaks of booms as if they are the greatest thing in the universe. The problem is akin to a drunk. Being intoxicated is fun and it's a party while your living the good life, but there is always a hangover. There are two ways you can handle a hangover: Take it as the punishment for your over indulgence, or you can start drinking again, the so called "Hair of the Dog." The economy is similar. When the investment is expanding and times are good consumption increases and people are allowed to live beyond their means. But malinvestment can only last so long and eventually there needs to be a correction. Cheap credit causes the inflation of bubbles by malinvestment. This continues as long as the Fed keeps pumping money into the system. As soon as they cut off the tap a recession becomes inevitable. This happened between 1981 and 1992. The Fed increased the money supply an average of 9.6% while GNP only expanded 2.6%. The Fed cut the tap off in 87 when the money supply expanded 4.1% to only 2% GNP growth. This planted the seeds for the early 90's recession.[2] The reason for this touches on my next contention. 2. Con argues that the Fed's manipulation of interest rates is in the best interest of the economy. This ignores the fact that the economy uses interest rates as a signal between consumers and producers.[3] The Neutral Interest Rate is the rate at which savings matches investment.[9] In other words the market coordinates time with interest. All decisions that are made are intertemporal. The decision to put off utility now (immediate consumption) in favor of future consumption (savings) signals to entrepreneurs and investors that demand in the future is higher, thus allowing them to confidently invest in longer term investments, longer production processes.[3] Consumers save money more when interest rates are higher because their rate of return outweighs the benefit of spending the money in the short term. When the Fed lowers interest rates it has two effects. 1. It sends false signals to investors that future demand is high so long term investments are wise and 2. It discourages savings by consumers because the return on their savings isn't as beneficial as their short term utility.[3] It should be clear that there is an inconsistency here. Consumers are not saving for future consumption and producers are preparing for a future demand that wont be there. Furthermore spending over resources begins a tug of war between consumers and producers that increases prices. For this reason the "efficiency" that the Fed brings is illusory. It isn't efficient to pit consumers and investors against one another. "Instead of a transfer of resources between savers and investors, the credit (financed investing) prompts competition over resources between consumers and producers"[3] This inconsistency is not beneficial for the markets because it breaks down the lines of communication between the consumers and producers. Note that investors will have increased output in the future because of longer production processes but consumers have shifted their consumption forward, and because of this will want to consume less in the future not more. This is the inconsistency that the federal reserve brings and sows in the economy. The eventual market corrections hurt the consumer more than business. 3. The Fed is needed for a strong economy.Furthermore if my opponent is correct in his assertion that the Fed can fine tune the economy by raising and lowering interest rates, then it should be possible for the Federal Reserve to bring an end to the business cycle. They should be able to make it so that investments never get too large to cause a bubble if his conclusions about being able to control the market simply by manipulating the monetary system are correct. He even goes so far as to say: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.This assertion ignores the history of the Fed. Since its inception it has not made the economy more stable. Recessions of the 20th century according to the National Bureau of Economic Research are: 1918–1919, 1920–1921, 1923–1924, 1926–1927, 1929–1933, 1937–1938, 1945, 1948–1949, 1953–1954, 1957–1958, 1960–1961, 1969–1970, 1973–1975, 1980, 1981–1982, 1990–1991, 2001, and 2007-2009[10] If the Fed's ability to change interest rates is needed for a strong economy why then do we see so many periods of economic contraction and suffering? Why didn't it control rapid growth to prevent these recessions? Why didn't it shorten them to months instead of years? 4. The Federal Reserve Ended the DepressionMy opponent also makes the assertion that there is consensus on the cause of the Great Depression. This is untrue. There are many different explanations for what caused it and for what brought us out of it. Murray Rothbard had the following to say:"We have also seen that the Federal Reserve Bank of New York effectively set the call rates for loans to the stock market, in cooperation with the money committee of the New York Stock Exchange, its policy being to furnish any funds necessary to enable the banks to lend readily to the market. The Bank, in short, used Wall Street banks to pour funds into the stock market.Alarmed at the burgeoning boom, and at the stock prices that rose about 20 percent in the latter half of 1927, the Fed reversed its policy in the spring of 1928, and tried to halt the boom. From the end of December 1927, to the end of July 1928, the Reserve reduced total reserves by $261 million....the Fed bought over $300 million of acceptances in the last half of 1928, thus feeding the boom once more. Reserves increased by $122 million, and the money supply increased by almost $1.9 billion to reach its virtual peak at the end of December 1928. At this time, total money supply had reached $73 billion, higher than at any time since the inflation had begun."[4]The Federal Reserve actually fueled the boom that led to the stock market crash. It stopped expanding the money supply by the end of 1928. It remained flat until June of 1929. Rothbard contends that from the end of 1928, as soon as the Fed's inflation ended, a depression was inevitable to adjust the economy. Furthermore the end of the Depression, some contend, was actually signaled by the end of WW2 and the cuts to military spending. Prosperity, they contend, cannot be measured with weapons of war but only by useful goods for consumers.[5] 5. The Fed could have prevented the Housing CollapseFinally my opponent says that the Fed acts as a regulator of the banks. It is not the job of the Federal Reserve to regulate how or to whom banks lend out their loans. It is true that the Fed regulates reserves and gives guidance on issues relating to bank assets. However most banks and thrift organizations are actually regulated by the Office of the Comptroller of Currency.[6] Furthermore the recession was caused by more than just banks, but by investment firms purchasing mortgage backed securities. In fact a source that my opponent cited places the blame partially on the Fed. Investors, in the age of low interest, sought out the higher rates of returns associated with CDO's. These, as we would later find out, contained many subprime mortgages. Because institutional investors now owned these mortgages they were much quicker to process foreclosures, increasing the inventory and decreasing housing prices which intensified the problem. His source goes on:"Low interest rates created an incentive for banks, hedge funds and other investors to hunt for riskier assets that offered higher returns. They also made it profitable for such outfits to borrow and use the extra cash to amplify their investments, on the assumption that the returns would exceed the cost of borrowing."[8]The issues that led to the great recession were not due to lack of regulation, but to cheap credit incentivizing bad investments as this source points out. Budget outlays for the SEC (the regulator of the stock market) increased 76%. The OCC saw an increase in staff between 2000 and 2008. The primary regulator of the banks, the Department of the Treasury, saw its annual average of new rules proposed increase from 400 in 1990 to 500 in 2000. This clearly shows that regulations and regulators increased in the years leading up to the crisis.[7] Sources[1]http://goo.gl...[2]https://goo.gl...[3]https://goo.gl... [4]https://goo.gl...[5]http://goo.gl...[6]https://en.wikipedia.org...[7]http://goo.gl...[8]http://goo.gl...[9]http://goo.gl...;[10]http://www.nber.org...;