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The Student News Site of Stony Brook University

The Statesman

The Student News Site of Stony Brook University

The Statesman


    End the Fed

    Tax season is coming to a close and across the country, the frustrated from both sides of the isle are taking to the streets in peaceful, but forceful, demonstrations. Thousands of ‘tea parties’ were held across the country on April 15th and future events are being planned. We even organized and executed a tea party at Stony Brook University; handed out informational fliers and symbolically chopped the head of an Obama stimulus check with a guillotine. So whats all the fuss? Protesters are holding tea parties to spread awareness and concern about the huge deficit spending being pursued under the Obama administration. According to an estimate from the non-partisan Congressional Budget Office, the cumulative deficit from 2010 to 2019 under the President’s fiscal policy proposals would total $9.3 trillion. Truly, the amount of debt currently being undertaken by our country is unfathomably great.

    Concerned citizens are worried that deficit spending, which was started at the Bush II’s term, will not only fail to bring about economic recovery -“you can’t spend your way out of debt” is the logical mantra – but when it comes time to pay the piper, we’ll be worse off.

    We’re taking money from main street to prop up wall street. The force of free markets is that when business fail, it leaves room for other ones to take their place. Recession is the cure for mistakes, gives time for resources to be reallocated and allows the economy to continue on an efficient and positive growth path. This covers Obama’s fiscal, tax-and-spend policies but it misses part of the picture. On February 4th, Representative Ron Paul (R-Texas) introduced H.R. 833 AKA The Federal Reserve Board Abolition Act AKA End the Fed Act. It’s exactly what it sounds like. With this bill, though its unlikely to ever get out of committee, Paul proposes to eliminate the Federal Reserve bank, which acts as the central bank of the United States.

    But why would we want to get rid of the Federal Reserve? The Fed helps control the money supply in the economy by setting targets for interest rates for interbank loans and by buying and selling treasury securities to banks.

    Because the United States operates on a fiat currency system, money creation is a relatively easy matter – although I’ve simplified the process here. This has allowed the subsistence of fractional reserve banking; that is, banks only a hold in reserve a fraction of the money has been deposited. This is a problem in the event of a bank run. A run on a bank happens when lots of people try to retrieve their money out all at once. Because banks lend out most of their money, a bank run can cripple a fractional reserve bank.

    Central banks prevent this from happening. If a bank has run out of money, they can sell securities to – or get a bailout from – the Fed and consumers get insurance from the FDIC. In this way banks can create credit by lending out more money than they would actually have in reserve.

    This ability to create credit gives an enormous amount of power to bankers and politicians. Monetary inflation is a way by which politicians pay for projects, pay off debts and, indirectly, tax its citizens. Print too much new money, however, and you get hyperinflation – the famous cases being the Wiemar republic and, more recently, Zimbabwe.

    The inherent problem is that printing money doesn’t generate new value to the entire money pool, so each dollar in the economy becomes less valuable. This inflates prices and wages. It discourages savings because if the inflation rate is larger than the interest rates from your savings or investments, it makes less sense to hang on to your money.

    Even more sinister, it may contribute to boom-bust cycles, according to some economic theories. Lowering interest rates encourages investors to take out loans, and in turn invest in risky, long term projects. The Fed creates money, investors put that money into risky investments, and when those investments turn out to be bad, sectors of the economy bust.

    According to Ron Paul, ” Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy.” But is taking away control of the money supply from bureaucrats and technocrats a good idea? Surely, since the creation of the Federal Reserve was intended as a reaction to market panics, and abolishing it would get rid of much needed regulation.

    There is logic to this, as is believed by the mainstream, but there is some evidence weighing against the idea. According to David Saied, the head of National Public Policy for the Government of Panama, Panama has no central bank and they do just fine. Although the US dollar is the money of choice, people are free to trade with what ever currency suits them. The result? Panama is the only country in Latin America that hasn’t experienced a financial collapse or credit crunch since its independence in 1903.

    Since the Panamanian Treasury cannot simply print money to repay its debts, it must be more careful with its fiscal policy; knowing that only levying taxes can pay for policy decisions. Even though banks can’t generate inflation, there have been no bank runs and bank failures do not spread. There is no FDIC or Central bank, so banks cannot make risky decisions, and assume the government will be there to bail them out. In Panama, excess foreign capital does not accumulate, but is lent offshore through international banks, and avoid monetary and trade imbalances. The macroeconomy of Panama is generally good, even though they experience deflation when resources get reallocated. Contrary to Keynesian economist predictions, the deflation does not spiral out of control in a paradox of thrift.

    I’m not suggesting that America should unquestionably mimic the Panama model, but it seems that everyday, as the Fed prints more money to monetize deficit spending and Obama proposes more spending policies, that the road towards central planning does not seem sustainable. Politicians stand too much to gain, and the taxpayers too much to lose, by letting our ‘representatives’ play games with our economy.

    We should be, at least, entertaining the idea of ending the Fed because, judging by the latest crisis – and dozens of others over the last century – it has failed in its stated goals of being able to stabilize the economy. President Obama and Fed Chairman Ben Bernanke are claiming that the economy is beginning to right itself and, no doubt, claiming that their policies are to thank. However, the dust clouds are far from settled and we are a long way from seeing the full long term affects of the subprime bubble. Alan Greenspan, the old Fed chairman, didn’t predict that the outcome of holding interest rates so low would be a housing bubble. Do we think this new round of politicians are somehow smarter, more farseeing, better able to control the affects of a mysterious economy? With every problem we use the government to solve, we may very well be generating a dozen new ones. Will government respond to that with even more regulation and micromanagement? So grab some tea and hit the streets. We may not have all the answers right now – only egotistical economists claim that they do – but we all have something to be frustrated about.

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