The Federal Reserve is Ruining America

I accept, and thank Kameron_Grayson for this debate on a very salient issue. I believe strongly that the position he is promulgating, though pervasive, is extremely dangerous, and I hope that, through this discourse, I'm successful in changing his mind. HousekeepingDefinitions seem self-explanatory, as does the burden of proof: as PRO is making the affirmative claim, he retains the burden to evidence his claim. Background It's crucial, before delving into this subject, to recall what exactly we're debating. The Federal Reserve is the central bank of the United States, composed of twelve regional banks and the Board of Governors in Washington D.C., the latter of whom are nominated by the President and confirmed by the Senate. The role of the Fed is to ensure the following: macroeconomic stability, or preventing widespread fluctuations in output, prices, and employment; financial stability, via macroprudential regulatory measures; and acting as the lender of last resort. My adversary contends that the Fed is "ruining America." But the fact of the matter is that we know what this country would be like in the absent of the Fed, because we didn't have a central bank until 1913. During the 1800s and early 1900s, the U.S. experienced banking panics roughly every 15 years, many of which grew into more systemic depressions (1). This was the case not only by virtue of lack of regulation, but because banking runs were common: there was no lender of last resorts, so a loss in confidence in the banking system became self-reinforcing, and that sentiment disseminated throughout the system. Fundamentally, the Federal Reserve is a virtue. This is not to say that it is without fault or that it hasn't ever done wrong--but to claim that it is actively "ruining America" is a wildly absurd claim. Rebutting Pro's CasePRO opens with a quote from a book from Frank Rexford, but this quote is wildly off-base, its assertions replete with callous misrepresentations. First, the quote refers to "private banks," but this is not applicable to the Federal Reserve in totality. This is not to say that the Fed is not a private, independent institution, but it was effectively created and remains a quasi-government agency. For one, it doesn't operate for the sake of profit: it turns over all of its profits to the U.S. Treasury each year (2). Second, it was greated by the U.S. Congress and is subjected to various forms of oversight by the Congress and the GAO (3). Moreover, it can be disbanded by Congress on a whim, or its powers significantly limited. Congress in recent months, for instance, has been debating legislation pertaining to auditing the Fed, and to compelling it to conduct policy in accordance with a Taylor-type rule: in other words, it would need to model its interest-rate decisions on a mathematical formula, and any time it deviates from this very simplistic rule, it would need to provide a thorough justification to Congress. Third, the scope and objectives of the Fed were written by, and can be modified by, the U.S. Congress. The Fed is to ensure maximum sustainable employment, price stability, and moderate long-term interest rates. What is often called its "dual mandate" is part and parcel of an institutional commitment to price stability, and there's a myriad of evidence, including a seminal paper by Alesina and Summers (1993) showing a clear negative correlation between central bank independence and average inflation (4). Next, this quote claims that bank "control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks]...will deprive the people of all property until their children wake-up homeless on the cintent their fathers conquered." First and foremost, this quote is hard to follow because of PRO's excessive use of ellipses, meaning that this quote is devoid of very critical context. Nevertheless, this line suggests some sort of conspiratorial scheme between banks and corporations which, contextually, the Fed must be involved in--but the fact of the matter is, this claim is utterly absurd and there is no evidence for it at all. Let me share with you some recent inflation numbers: bear in mind that the Fed's commitment requires that it keep inflation at roughly 2 percent. All of the numbers that follow are taken from the St Louis Federal Reserve database (5), which collects and compiles data from various agencies--BLS, BEA, Commerce Department, Census, etc.--which calculate it on a monthly, quarterly, daily, etc. basis. First, the headline PCE Index is only at .75% year over year as of December 2014. Second, the headline CPI index is at .76%.Now, of note is the distinction between headline measures of inflation and core. Headline is a measure of the change in all prices in the economy, but this includes volatile measures of energy and food prices. Whereas most prices in the economy are "sticky" in the short run, energy and food prices tend to be much more volatile, and subject to exogenous factors. For instance, oil prices have been plummetting for months because of falling global demand in emerging market economics such as China, coupled with increased production (6). These prices are effectively beyond the purview of the Fed and it exerts limited, if any, control over them--which itself invalidates PRO's claim. As a result, the Fed targets measures of core inflation, or inflation excluding food and energy, specifically the core PCE Index, currently at 1.3% (5). You'll note that all of these measures trail the Fed's two percent objective, so the notion that the Fed is "creating inflation to deprive people of their property" is factually absurd. Moreover, nominal wages in most cases are indexed to measures of inflation. In other words, if inflation rises X percent, nominal wages tend to rise X percent, resulting a net zero change in the cost of living. Finally, PRO's quote claims that the "issuing power should be taken from the banks and restored to the people, to whom it properly belongs." But, again, there are several problems with this. First, the Treasury does have the power to issue U.S. dollars. Second, the Fed was created on Congress, and thus was indirectly the byproduct of the voice of the masses. Third, returning this power to Congress would be disastrous, as the study I provided earlier demonstrates. Interweaving political whims and monetary policy gives way to an inflationary bias, as politicians use it as a tool and a scapegoat in order to ensure their own reelections bids--and there's evidence for a "political business cycle" to the effect of pursuing overly expansionary policies prior to an election--policies with widespread negative long-run ramifications--and allowing those impacts to materialize ex post facto. Moreover, why would PRO entrust these complex monetary policy decisions--decisions that can impact the world economy at the drop of a pin--with the dysfunctional Congress that can hardly pass a budget?I'm out of space, but in my next round, I'm going to address a few more claims from PRO. For instance, I'll discuss the problems with the gold standard that PRO advocates for, the problem with claim that we are printing "counterfeit money" and are "owned by the banks," the nonsensical notion that it is "printed and handed out daily," and his bogus claim that the U.S. declared bankruptcy in the 1930s, or that the malaise of the 1930s was the fault of the Fed "printing money."With that, I yield the floor back to PRO, and thank him for this debate. References (1) http://tinyurl.com...(2) http://tinyurl.com...(3) http://tinyurl.com...(4) http://tinyurl.com...(5) http://research.stlouisfed.org...(6) http://tinyurl.com...