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Throughout the years, the Fed has put forth many
arguments to rationalize the growth of debt: excess liquidity is a result of
Asian savings; financial innovations have allowed for more debt and faster
GDP growth; asset growth has outpaced debt growth. While it may be
appropriate for such arguments to be made by the private sector as it seeks
to encourage more debt assumption, the fact that these arguments were being
put forth by the Fed indicates a flaw in the current system. If the Fed was
the institution justifying greater leverage, if the Fed was encouraging
Americans to take on adjustable rate mortgages, if the Fed was its own
apologist, what force in our society is the responsible counterbalance, the
voice of reason encouraging a more sound financial sector, higher interest
rates, and more savings with less debt?
Some
Fed apologists may try to characterize the institution as a victim, having
been unable to control the debt being created outside of its purview. While
there is some truth to this line of thinking, it misses the bigger problem:
the Fed has the biggest system-wide tool to encourage savings and to limit
debt. Yet, for the last 20 years, by consistently lowering interest rates,
the Fed has been using this tool to encourage more debt. The Fed has also
encouraged deregulation, changes in CPI calculations, changes in reserve
requirements, and the use of derivatives --- all of which help add more debt
and leverage into the system. In addition, most Fed officials have engaged in
actions and bailouts that fostered moral hazard and created an environment of
risky behavior, as investors openly talked about how the Fed would come to
the rescue should anything go wrong. In the end, it appears these investors
were correct in their estimation.
Many
short-term solutions to our current problems will be proposed. Some will be
helpful. Other will only make the long-term problem worse by adding more debt
than GDP. If we are to avoid the problems of the past, any long-term solution
must add checks and balances to the Fed’s mandate to ensure appropriate
levels of debt within our financial system. The Fed should be responsible
stewards of the U.S. currency and conservative guarantors of the banking
system.
Fake Ben
Bernanke
FakeBen.com
FakeBen is a blog
to monitor the Fed and its actions and encourage community participation. At
FakeBen, we believe that the Fed policy of the last two decades has created a
credit bubble as large as that created in the 1920s. This bubble will lead to
either inflation, a recession, or both.
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