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Last week the Federal Reserve began the second
incarnation of “Operation Twist”, an attempt to drive down
interest rates by purchasing long-term Treasury debt and selling short-term
debt. This is just the latest instance of the central bank desperately
flailing around doing something merely for the sake of doing something. Fed
officials still do not understand — or admit — that the Fed
itself caused the financial crisis by driving interest rates too low and
relentlessly expanding the money supply. Thus, this latest action will just
exacerbate the problem.
Markets, however, understand that the
Fed has failed and has no clue what it is doing. This is why markets went
into a tailspin after the Fed’s new strategy was announced. Stock,
bonds, and commodities dropped in price while the financial press wondered
whether this worldwide sell-off meant that the entire system was collapsing.
Not since 2008 had there been such a dramatic drop across so many different
sectors of the market.
Because of continued rising inflation and the Federal Reserve’s suppression of
interest rates, investing in traditional safe havens such as savings
accounts, mutual funds, and Treasury bonds has become unprofitable. Lots of
money is moving through the system seeking a return on investments or at
least some measure of safety, as increasingly desperate investors move their
funds around in search of long-term profits and stability. Until the Fed
stops its monetary intervention and allows interest rates to be set by the
free market, investors will move their money in a volatile manner. They will
invest in commodities and stocks while prices swing upwards, but will flee to
bonds and cash at the first sign of a downturn.
The uncertainty caused by the Fed does
help some people – professional traders on Wall Street for example.
Increased volatility and huge price swings mean more opportunities for
profit, as sophisticated electronic trading programs can buy and sell huge
positions within a fraction of a second of a major market movement. But small
businessmen are misled by the artificially low interest rates into making
unwise investments, and those whose jobs vanish when the Federal Reserve’s latest bubble
pops suffer. Without the knowledge or ability to move with the markets or
diversify overseas, average Americans see their savings stagnate or depreciate
— along with their hopes and dreams for a better tomorrow.
The only way
to return to a sound economy is for the Federal Reserve to cease and desist its monetary manipulation and allow interest rates
to be determined by markets, just as the price of goods, services, and labor
should be determined by markets. Everything the Fed is doing by pumping money
into the economy benefits only the insolvent, too-big-to-fail banks. Low
interest rates encourage consumers to take on more debt, meaning more profits
for the banks issuing those loans. Purchasing mortgage-backed securities, as
the Fed has done, keeps housing prices inflated, helping the banks who have
non-performing mortgages on their books. However, it hurts consumers who
continue to be priced out of the housing market. In order to maintain a
decent standard of living for the American people and to restore the vibrancy
of the U.S. economy, it is time to end
the Fed.
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