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Section A: General News


Editorial: Prophets and losses




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Thomas Sowell
March 6, 2013 | 1,268 views | 10 comments

Now that the federal government is playing an ever-larger role in the economy, a look at Washington’s track record seems to be long overdue.

The recent release of the Federal Reserve Board’s transcripts of its deliberations back in 2007 shows that their economic prophecies were way off. How much faith should we put in their prophecies today -- or the policies based on those prophecies?

Even after the housing market began its collapse in 2006, Federal Reserve Chairman Ben Bernanke said in 2007, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”

It turned out that financial disasters in the housing market were not “contained,” but spread out to affect the whole American economy and economies overseas. Then Chairman Bernanke said, “It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth.”

What is an even more interesting question is why we should put such faith and such power in the hands of a man and an institution that have been so wrong before.

This is not just a question of a bad guess by Ben Bernanke. The previous chairman of the Federal Reserve System, Alan Greenspan, likewise misjudged the consequences of the housing boom and bust. Nor was the Federal Reserve’s staff any more accurate in its prophecies. According to the New York Times, “The Fed’s own staff still forecast that the economy would avoid a recession.”

Today, the economy has not yet fully recovered from the recession that the Federal Reserve System’s staff and chairmen thought we would avoid.

We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System -- or the seemingly boundless confidence that Fed Chairman Ben Bernanke still shows as he intervenes in the economy on a massive scale.

Not only does the Federal Reserve System control the money supply and regulate banks, the Fed’s willingness to keep buying hundreds of billions of dollars’ worth of government bonds makes it easier for the Obama administration to keep engaging in massive deficit spending that runs up a record-breaking national debt.

The reason that the Federal Reserve can afford to continue buying huge amounts of government bonds is that the Fed is authorized to create its own money out of thin air. They use the fancy term “quantitative easing,” instead of saying in plain English that they are essentially just printing more money.

Being wrong is nothing new for the Federal Reserve System. Since this year is the one hundredth anniversary of the Fed’s founding, it may be worth looking back at its history.

President Woodrow Wilson explained the reasons for creating the Federal Reserve System. He said that the Federal Reserve “provides a currency which expands as it is needed and contracts when it is not needed” and that “the power to direct this system of credits is put into the hands of a public board of disinterested officers of the Government itself” to avoid control by private bankers or other special interests.

The Federal Reserve was supposed to prevent shocks to the economy that can come from drastic inflation or deflation, and reduce the dangers that can come from widespread bank failures. These are all good goals. But what is the Fed’s track record?

In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded. The biggest deflation in the history of the country came after the Fed was founded, and that deflation contributed to the Great Depression of the 1930s. As for bank failures, they reached levels unheard of before there was a Federal Reserve System.

Like so many “progressives,” then and now, Woodrow Wilson seemed to think that, if those who made government decisions had no financial interest in those decisions, that they could be trusted to wield their powers in the public interest.

But the enormous power wielded by the unelected leaders of the Fed over the economy, unchecked by the constraints of the market, has repeatedly turned out to be more than human beings can handle.

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University. His website is http://www.tsowell.com.

Copyright 2012 creators.com
 

Your Opinions and Comments

 
PRAIRIE GROUCH  
GRAND PRAIRIE TX  
March 9, 2013 10:21am
 
My last posts should have been directed toward Facts only please.....I apologize to Be Careful. I should know better than to reply before at least two cups of coffee have been consumed. :)

 
PRAIRIE GROUCH  
GRAND PRAIRIE TX  
March 9, 2013 8:31am
 
Be Careful.....I see that you are suffering from the same BB virus as Obama. You both need to get over this Blame Bush narrative. It was your own decisions on investment that caused you to lose money in your 401k. You ... More ›

 
PRAIRIE GROUCH  
GRAND PRAIRIE TX  
March 9, 2013 8:17am
 
Be Careful.....Did your expert management have any effect on the fact that you lost 401k valve during the last downturn ? If the FED has to pump up the economy, then everyone should fear the results when that stimulus stops. ... More ›

 
Facts only please  
TX  
March 8, 2013 8:37pm
 
PRAIRIE GROUCH: Really, I lost all of my 401K because of Bush and now it is back....Do you even have a 401K? If so, maybe you need some help from one of those 200 per hour advisors... Or maybe you ask me for my advise for ... More ›

 
PRAIRIE GROUCH  
GRAND PRAIRIE TX  
March 8, 2013 1:46pm
 
Be Careful......A few years ago, some savers lost almost half the value in their 401k. While the younger ones have probably recovered, those at or approaching retirement ages were severely affected. Good luck. Maybe your ... More ›

 
PRAIRIE GROUCH  
GRAND PRAIRIE TX  
March 8, 2013 1:28pm
 
Bulls bellow when the market is doing well. It will be interesting to see how the final results of 401k investments work out. 401k payouts are subject to federal income taxes and the ravages of inflation. Two hundred and ... More ›

 
The Marcelina Muse  
Dry Tank, TX  
March 8, 2013 12:50pm
 
He has not had time to read my post. He is the guy who oils the printing presses over at Treasury and they have been too busy printing paper. Keeps the stock market up you know.

 
Proletariat  
Utopia,Tx.  
March 7, 2013 1:27pm
 
Nice tongue -in-cheek Muse ! I wonder if Facts picked up on it.

 
The Marcelina Muse  
Dry Tank, TX  
March 7, 2013 12:08pm
 
Facts, you should put all your eggs in the stock market right now. Yeah, I definately think that would be a wise investment given the stable and improving economy. I mean with such low unemployment and low national debt things ... More ›

 
Facts only please  
TX  
March 6, 2013 11:37pm
 
Not fully recovered? How wrong can this person be my 401 is up 300% and the stock market is at a all time high. the reason is clear...do not publish or listen crap from these guys...

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