The Federal Reserve should be abolished

Framework: Pro has to show that the Federal Reserve (the Fed) should be abolished. This means that his critiques cannot be directed towards policies of the Fed that can be modified or ended (which would be reforming it, not abolishing it). C1-Interest Rates The Fed has the ability to control interest rates. This helps the Fed end recessions, keep inflation low, and soften the bursting of economic bubbles (or even prevent them). In the early 1990s the United States was in a recession. However, the Fed cut interest rates from above 8% to 5% in 1992. (1) (2) This brought the American economy out of recession and eventually led to surging economic growth and rapidly decreasing unemployment rates. (1) The Fed also helped growth rate continue in 1998, when they cut interest rates to 4.75% to counter the Asian financial crisis. This helped keep the American economy strong to prevent a global economic crisis, specifically leading to an abundance of Internet start-ups. (1, 3) Lower interest rates allow the economy to grow because people are more encouraged to spend, because there is less interest on savings and less interest on adjustable mortgage payments (which means people have more disposable income) and they can borrow money to invest for cheaper. Overall: P1) Lower interest rates increase spending and investment in the economy. P2) As spending increases, businesses become richer, and can hire more workers and pay existing workers more. P3) Richer people can spend more. C) Lowering interest rates allows economic growth and less unemployment rates. During the American economic growth in the 1990s, inflation rates stayed stable. (4) This was because whenever inflation rose, interest rates were raised more. (5) Higher interest rates prevent inflation because there is less spending/investment, so prices are less, and therefore inflation is less. Raising interest rates also presents the benefit of preventing asset bubbles. This is because with low interest rates speculation occurs. This was displayed in the formation of the Japanese Asset Price Bubble. Japan already had a huge surplus in their banks and when the Bank of Japan (BoJ) further lowered interest rates the stock market and real estate inflated. (6, 7) By the time the BoJ finally did raise interest rates, the bubble was too large and stock and real estate markets collapsed. Overall, the Fed’s ability to control interest rates is important, because it gives them the abilities to end and prevent recessions and control inflation. Due to this, if the Fed was abolished the US economy would suffer. C2-Inflation Targeting The Fed aims for a 2% increase in inflation over the medium term, which helps prevent deflation. (8) Deflation can be really bad for the economy, as illustrated during the Lost Decade in Japan. After the stock market crashed, the BoJ tried to lower interest rates to near 0%. However, people and companies were still reluctant to spend and invest, partly due to the debt many companies amassed during the 1980s. (9) This is the main reason Japan had very little economic growth in the 1990s. Overall: P1) The value of debt on companies and people increases. P2) Companies and people are less likely to spend/invest. P3) Companies are making fewer profits. P4) Companies are forced to lay off and decrease wages for workers. P5) People save their money more. C) Deflation is dangerous to the economy and lowers consumption. This is important, because without a safe amount of inflation to prevent deflation, the economy would be in serious trouble. Therefore, the Fed should not be abolished to help prevent too much inflation or deflation. C3-Bank Supervision and Regulation The Fed also plays the role of supervising and regulating the banks. (10) Ever since the recent Financial Crisis, the Fed has been conducting “stress tests”. This is where the Fed examines bank’s credit, market, and liquidity risk. (11) This was in result to the recent financial crisis, where many banks were underfunded. Overall, by ensuring banks have enough capital (or by giving tips of how to increase capital), the economy is safer from banks not having enough in reserves. The Fed also ensures that banks give fair and equitable services to their communities. (12) This is done by ensuring banks keep at least 10% of their deposits in reserves. The Fed also examines whether banks make good investments, including only giving loans to people based on their ability to pay them back (which the lack of, was a primary reason for the financial crisis). (12) The importance of bank regulation can be seen by the performance of Canadian banks during the recent financial crisis. Canadian banks were much more regulated than American banks in 2008. Canadian banks had less leverage than American banks (resulting in more money in reserve), didn’t give mortgages to people unlikely to pay them back, and it overall involves a lot less risk. (13) The safer banks are, the less likely they are to face crisis, and therefore the safer people’s money are. Even though the Fed’s regulation is not at Canada’s level of regulation, abolishing it would just cause more bank failures and more people losing their money. The lack of a Central Bank has already shown banks do this, such as when the Second Bank of the United States was shutdown. Banks began lowering their lending standards and keeping a relatively less amount of money in reserve. (14) For the sake of keeping the banking system stable, the Federal Reserve should not be abolished. Sources: 1-. http://en.wikipedia.org...2-http://madashelland.com...3-http://en.wikipedia.org...4-http://cdn.housingjapan.com...5-www.nber.org/digest/dec01/w847.html6-http://www.thebubblebubble.com...7-http://cdn.housingjapan.com...8- . http://www.federalreserve.gov...9-http://www.nber.org...10-http://www.frbsf.org...11-http://www.investopedia.com...12-13-;14-http://en.wikipedia.org...;