All Hail the Great and Powerful Oz – err, I mean Fed

Tim Bean

12/12/2012

 

wizard-of-oz hologramToday I read an article from the Associate Press, by the AP’s Economics Writer Martin Crutsinger about our illustrious Federal Reserve Bank.  The headline of this article is “Fed Predicts Higher Unemployment For Next 3 Years,” as I am sure many of us are thinking upon reading that headline, that that is certainly the kind of news that bolsters confidence in things getting better anytime soon – or at least for the “Next 3 Years.”

The news isn’t all bad though, because in this article it explains how the Fed expects the economy to grow; just not fast enough to improve and increase the employment opportunities of out of work people in the land of the free, and the home of the brave.  They expect, ne predict, that economic growth will hover around 3% from now until that magical year of 2015, when we apparently can all sing the old depression era smash hit, “Happy Days are Here Again,” – which was also used as FDR’s campaign song.

To many a mortal human we have been indoctrinated to the notion that the Federal Reserve is somehow capable of otherworldly powers of prescience, and omnipotence that can manipulate the economy around calamity and catastrophe.  Well, sadly, they have failed at pretty much any of that.

The Federal Reserve Banking system was created in response to a real estate collapse (sound familiar) in 1907, and Congress passed the Federal Reserve Act in December of 1913.  This “magical” independent organization was charged with maximum employment, stable prices, and moderate long-term interest rates.  Yet in less than 16 years after the establishment of this institution, and stocking it with brilliant minds, our country entered the worst depression in its history (so far); and somehow the Fed’s omnipotence and prescience failed to see it coming, and some contend failed to solve the economic malaise too (the mobilization of the WWII effort is what many contend actually ended the depression).

So, how has the Federal Reserve done with the whole “price stability” thing?  Well, when you consider that since the inception of this organization, stocked with economic wizards, that today’s almighty dollar could only buy about a nickel’s worth of pre Federal Reserve goods and services; meaning the buck has lost about 95% of its purchasing power since 1913; then I would say that the Fed has failed in price stability too.

bernanke_09_dollar_since_1913_cpi_deflator

Then there is their charge in the maintenance of moderate long-term interest rates.  Interest rates fluctuate according to market forces, and credit availability.  Prior to the creation of the Federal Reserve long-term interest rates fluctuated between 11.5% and 3.7%.  Following the Federal Reserve, and their market manipulations, long-term interest rates went from a post WWII low of 2.09% to a high of more than 14% in 1981, and today are at about 2.9%.  So, you can draw one of two conclusions from that, (1) the Fed has either had no impact on controlling or “maintaining” long-term interest rates, because they still fluctuate, or (2) the Fed has simply failed at controlling long-term interest rates; because if they had succeeded one would expect less fluctuation in those interest rates.

Long Term Interest Rates

Now how about we look at the Federal Reserve’s mandate of maximum employment?  We should expect that, given the Fed’s magical powers, unemployment should remain relatively stable; right?  Well, let’s consider 16 years after its creation unemployment soared to about 25%.  Fell to under 3% during the 1950’s.  It spiked again to 11% in 1980/81.  Fell again just under 5% in 2000; and then spiked to just a shade under 10% in 2008; and they are predicting that unemployment rates will remain above 6% for the next three years – FYI a 5% unemployment rate is widely considered “full employment.”  When I consider all of the history behind each of those numbers (Great Depression, Post WWII boom, Oil Embargo/post-Vietnam stagflation, Dot-Com boom, Real-Estate/Credit Crunch), instead of placing them in a hermetically sealed bubble, then I would say that the Federal Reserve has failed in achieving their employment mandate too.

US_Unemployment_1890-2008

If you draw a trend line from 1945 to present the trend is going up

Which brings me back to this article; and I have to ask myself, given the Federal Reserve’s lack of predictive, let alone preventative measures to stave off pretty much anything and everything that they have been charged with, then how exactly am I supposed to put much stock in this, their latest prediction?  This is not to say that I believe that these are not very smart individuals, nor is it to say that I necessarily disagree with this prediction; I actually think their numbers are a bit optimistic given the financial state of our country (trillion dollar deficit spending in perpetuity, $16 trillion and ballooning debt, and when factored in with unfunded liabilities that number approaches $100 trillion; which is over 500% of our Gross Domestic Product!  GDP equals the value of all goods and services produced in a country, so think about the 500% number a little while.).  Only in government circles can a near zero success rate be considered worthy of continued credibility. The Federal Reserve and their crystal ball (more like Magic 8-ball) has failed to foresee, predict, and prevent the Great Depression, the Dot-Com Bubble, the now so called “Great Recession,” so it predictive abilities are miserable.  It, and the people that make it up (sometimes I think they quite literally make it up as they go) have about as much wizardry skills as the Great and Powerful Oz.  They are simply a bunch of people operating behind a curtain, using a bunch of smoke and mirrors to fool everyone into believing that they have these supernatural abilities over the economy.  Given their track record, and lack of any real demonstrative abilities to stave off economic problems, I’d say that we all should not put too much faith in pretty much anything that comes from its emerald palace.

 

Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.  (Former Senator Barry Goldwater).

By this means [Central Banking] government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft. ( John Maynard Keynes (the father of ‘Keynesian Economics’ which our nation now endures) in his book “THE ECONOMIC CONSEQUENCES OF THE PEACE” (1920)).

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