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.