Does the Federal Reserve cause booms and busts?

I recently asked Federal Reserve Governor Jerome H. Powell what he would say to the critics of the Federal Reserve who say that the Fed is the cause of the boom and bust cycle.  I figured that any answer would do.  This was his response:

“The question was do we cause booms. I guess I would really look at that question this way: What would life be like without the Fed. In other words, I wouldn’t expect perfection from of any government organization, or of any organization of any kind.

So the fed will never get things perfect and the fed has made mistakes. Right? We allowed inflation to get out of control in the 70s. Policy improves over time, we hope. Exogenous events happen and they make fools of everybody and then they’ll make geniuses out of everybody. So don’t expect perfection. But over time it has made sense – I think the Fed has done a good and improving job in keeping inflation low now for more than 30 years, and essentially having pretty good results.

Now are you going to point – now you ought to be pointing at the financial crisis and say “how did that work out?” The financial crisis is not something that -- any government agency that had a responsibility for the economy can feel really good about. So mistakes get made.

But I guess the question I would ask back is what would life be life with no – if you look back pre-fed, there were very severe depressions—depressions that looked a lot more like the Great Depression.

In this depression (sic), output went down 4%. In the Great Depression, output went down 25%. That kind of thing happened a lot in the 19th century. You had these hard stops of credit. The banking system would fail. There would be a run on the banks. JP Morgan personally would come in and get his friends together and bail out the system.

But – so the judgment was finally made to create a central bank. There is no advanced economy in the world that doesn’t have a central bank that does pretty much the same thing the Fed does. No one has run an experiment in a very long time of not having a central bank. Don’t really think that’s a way to go.

Where I went wrong in my last post

"He knows better than that."

I do.

So I'll make a correction. The U.S. got out of the Great Depression by drastically cutting spending; so implementing that very Christian policy brought relatively prosperous times. We eventually had the #1 economy.  But it was temporary.

Christian Policy? Yes.

Christians are urged not to get into debt and the government is prohibited from stealing property--money in this case--for their own uses. Cutting spending is the economic equivalent of the King stealing less property and allowing it's citizens to freely do business.  As Douglas Wilson once put it, "Free markets are the economic expression of the apostolic teaching that we are to serve one another in love."

Even if you couldn't find any exegetical wiggle room to interpret the commandment as applying to the government, thou shalt not covet would still apply to the individual; therefore, and individual king (president) could not covet it's constituents properties.

Imitation of Christians -- a form of behavior modification that doesn't get to the root cause of social ills -- even when secularists don't realize they are imitating Christians, in political policy or personal ethics, will only bring a temporary fix. But it will be a fix.

Lasting prosperity will come when there is a sustained spiritual revival combined with a return to God's law in economic policy. Imitations of it will be temporary. But at least it will work for a while.

That's the part I missed out in my last post. So if you wanted to poke the ultimate hole in my last post, you could easily have pointed out that there was no spiritual revival, I think, or at least another "Great Awakening" in the mid-1940s in the United States.

The Return Of The Great Depression?

Christian Mensan Vox Day talks to Sean Hannity about his book The Return of the Great Depression.

Why Is the Stock Market Plunging? - Robert P. Murphy - Mises Daily

To recapitulate my argument from a previous article: Alan Greenspan's low-interest-rate policy in the wake of the dot-com crash spawned the housing bubble. Greenspan's Fed didn't actually eliminate the need for a recession, but instead postponed the crisis and made it fester. When reality hit in September 2008, Ben Bernanke was in charge of the Fed and implemented his predecessor's failed approach times ten.

Why Is the Stock Market Plunging? - Robert P. Murphy - Mises Daily

Video: Gerald Celente on Alex Jones Tv - Part One (8/4/11)

Video: Top 3 Myths About the Great Depression and the New Deal

No more "Stimulus!" It fuels the fire!

The official statistics show unemployment is at 10%. However the unofficial statistics show that it is at 17%. During the 1st Great Depression unemployment peaked at 25%. And what did the government do then?

They added fuel to the fire.

Instead of letting market forces do their work, FDR and Herbert Hoover began a long chain of intervention in the economy. This merely prolonged the recovery. This legislation was known as the New Deal.

Economist Thomas Sowell has pointed out that the New Deal did not end the great depression, World War II did. He explains that the War itself wasn't a catalyst for economic recovery since wars increase national deficits and destroy natural resources. Instead, World War II stopped the New Deal - the same intervention that was supposed to help the recovery!

I obviously did not explain HOW the New Deal prolonged the recovery. What I will say is that it reallocated resources to places to where it should not have gone.

Think about it today, does anyone REALLY THINK (besides the Obama Administration) that spending on COSTRUCTION JOBS will help fuel economic growth? How does this help the private sector? By allowing them to travel to work faster?

The Obama administration is making the same mistakes as its predecessors. Little do many know there was a recession in the early 1920's (I think 1920-1922) much worse than the first year of the great depression in the 1930's. But the government did the right thing. They didn't intervene and the recession was over within two years.

Maybe if our government takes its hand off of the economy maybe it will actually be free to grow!

For two recent articles on this topic click here:
Associated Press takes on Stimulus Spending
Peter Schiff on government job "creation."
Thomas Sowell on Obama's Job "Creation"
Phyllis Schlafly on Unemployment Causes
A second column from P. Schlafly on Unemployment