Money in Bad FaithCommentary, Featured, Scholars' Corner — By Theodore Phalan on January 21, 2013 at 10:18 AM
The depredations of the Fed.
by Judy Shelton
The Federal Reserve is not your friend. Whether you reside on Wall Street or Main Street, whether you are a borrower or a saver, whether you lean toward the Tea Party or the Occupy Wall Street movement—or whether you simply believe in free markets and free people—loose monetary policy is bad for you and for your economic prospects.
Would a friend lure you into taking unjustified risks in pursuit of a false promise of monetary gain? Would a friend try to pull the wool over your eyes by paying you with cheapened tokens? Would a friend induce you to seek financial rewards through speculative conniving instead of virtuous endeavor?
If the GOP wants to be the party of sound money—not only as a vital tenet of government fiscal responsibility but also as the ethical foundation for free-market capitalism—Republicans should start focusing on the harmful consequences of unwarranted money creation by our central bank. People need to understand how the Fed’s efforts to “stimulate” economic activity through monetary policy are fomenting a destabilizing fissure between the real economy and the precarious world of high finance.
When money creation is out of sync with productive economic growth, the link between honest effort and reward is damaged. It is disheartening to keep working away at providing real goods and services while others are seen to receive arbitrary gains whenever the Fed bestows its latest quantitative easing gifts on financial markets. And it’s discouraging to plan carefully for the future only to have seemingly prudent economic decisions transformed into disappointing, life-altering mistakes.
How can we blame people for buying homes they can’t afford when interest rates were lower than inflation during the 2000-2003 period? As John A. Allison, former head of banking giant BB&T, explains in The Financial Crisis and the Free Market Cure: “This creates a huge psychological and economic incentive to borrow.” Banks were also motivated to make as many loans as possible—not only to serve customer demand but also because the Fed’s policy of low-but-perpetual inflation indicates a government bias toward continually rising housing prices.
Who could have foreseen a global financial crisis that would utterly confound such reasoning? Certainly not the Fed; our central bank was clueless about the credit bubble that would burst in 2008, despite its central role in fueling it.
So did those homebuyers act irresponsibly? Should the bankers be condemned as “predatory” lenders? Or did well-intentioned individuals respond logically to faulty price signals engineered through the defective monetary policies of the Fed? It’s time to recognize the social costs imposed by such distortions as well as the economic losses. Money miscalibration sets people against each other for reasons having more to do with skewed incentives than selfish motivations. …