Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Rep. Ron Paul (R-TX) wants to get rid of the U.S. Federal Reserve System – an issue that he has made the centerpiece of his campaign for the Republican presidential nomination. Paul, and like-minded libertarians, think the Fed’s constant intervention in our economy leads to disasters like the housing collapse, banks taking on too much risk, and the debasement of the dollar.
Is Paul right? Or is he off his rocker?
First, a quick explanation of the Fed’s role:
The Fed’s over-arching mission is to maintain full employment and keep inflation at a gradual or moderate pace. Its open market committee controls the money supply and uses that power to manipulate short-term interest rates. If the economy needs a boost, the Fed will lower rates, making cheap money available for investment. If the economy is facing threat of inflation, the Fed can raise rates, putting a brake on economic activity.
Ron Paul thinks the Fed’s “tinkering” with the economy leads to more extreme and drawn out financial bubbles. Take the 2008 financial crisis. In the early part of the 2000s the Fed kept interest rates very low in an effort to bolster the economy in the aftermath of technology stocks collapsing and the 9/11 attacks. Those low rates lead to dirt-cheap mortgages that allowed people to buy houses at an unprecedented rate. This sent home prices soaring above historical levels and set the stage for an inevitable bubble burst.
But instead of allowing basic supply and demand to bring equilibrium back to the market, the Fed has done everything in its power to slow the natural order of things. It has further lowered interest rates and helped bail out big banks hurt by holding bad mortgages. As a result, it has unnecessarily extended the length of the housing crisis to its current six years. Or so Ron Paul would argue.
So maybe the Fed isn’t perfect. Should we eliminate it? Not before considering the possible downsides. Without the Federal Reserve we could see:
1. Haywire interest rates: Who would control interest rates in a Fed-less world? An unfettered free market? A cabal of Wall Street bankers? Congress? You can see the problems with these scenarios.
2. More bank failures: The Fed serves as a last-resort lender for struggling financial institutions. Without it, we’d almost certainly see more bank failures, from Main Street to Wall Street.
3. Less lending: Without the support of the Fed and other safeguards, banks would be far more conservative in their lending. Fewer people would qualify for mortgages, fewer businesses would be funded, and the economy would look very different.
Are Americans willing to work without the safety net the Fed provides… or do most people think of the Fed as some mysterious black box? Is Ron Paul Crazy… or the only sensible one at the table?
– By Wes Moss, for Atlanta Bargain Hunter