After the recent stock market sell-offs, not only on Wall Street in the United States, but in stock markets all over the world, it has become apparent to more and more people that the Federal Reserve needs to do something. But what?
Federal Reserve Caused the Economic Crisis
The first thing people should understand is that the Federal Reserve caused the economic crisis (including the Great Recession, which technically ended) that we are a now in. The Federal Reserve caused the Great Recession by draining liquidity out of the economy.
Since then, the Federal Reserve has very foolishly lowered interest rates to artificially record low levels. It’s the artificially record low interest rates which are the problem now. More on that in a minute, first some background.
Ben Bernanke Still Has No Idea What He is Doing
When Ben Bernanke took over as Federal Reserve Chairman in 2006, I wrote him a letter warning him that Alan Greenspan had the Federal Reserve on a path that would ruin economic growth. I told Bernanke that if he did not change course, the Federal Reserve was going to end economic growth in the United States.
Bernanke replied with a letter telling me that he was following the course laid out by Congress for the Federal Reserve. If I had a problem with that course, I should take it up with Congress. There’s not much one can do when someone thinks like that.
In 2007, as more and more banks in the United States kept taking larger and larger write-offs on their balance sheets, I wrote an article, Are We Headed for Deflation?, in which I again warned the Federal Reserve that if they did not start providing liquidity in the economy we were headed for a recession and deflation.
Throughout 2007, Ben Bernanke kept telling everyone that the sub-prime mortgage crisis was not going to spill into the general economy and would not seriously hurt economic growth.
By 2008, it was clear that Bernanke had no idea what he was doing. He continued to follow Alan Greenspan’s lead, and by 2009 he had completely wrecked the US economy. Beginning in early 2009, I wrote a series of articles detailing what the Federal Reserve needed to do to end the economic crisis. To see those articles look through Real Questions for the Federal Reserve on page 2.
Federal Reserve Foolishly Lowered Interest Rates Too Much
Eventually, the Federal Reserve started doing exactly what I said they should have been doing in 2007, and the crisis ended. But the Federal Reserve went far beyond what I said, and they somehow determined that by lowering interest rates to artificially record low levels, they would help revive the economy.
I wrote an article in 2009, Low Interest Rates Cause Low Economic Growth, detailing why artificially record low interest rates actually hinder economic growth.
We are in the grips of another crisis today because the Federal Reserve has interest rates too low. Without the ability to earn interest on loaned money, a money supply cannot grow of its own accord.
The Federal Reserve has propped the money supply up twice by its quantitative easing measures, QE1 and QE2, but as soon as the Federal Reserve stops providing liquidity, the economy stalls because the money supply cannot grow on its own with artificially record low interest rates.
Federal Reserve Needs to RAISE Interest Rates to Foster Growth
So the Federal Reserve has to start raising interest rates if it wants the economy to grow on its own, and the unemployment rate to fall dramatically. The problem is, the same people who caused the economic crisis are the same ones trying to figure out a solution.
Even if they listen to me and start raising interest rates, they will bungle the job (like they did by lowering interest rates to artificially record low levels) and cause other problems down the road. That’s because nobody at the Federal Reserve understands how or why an economy works. They are masters at getting in the way of how an economy works.
The only other way the Federal Reserve can help the US economy today is start another round of quantitative easing, QE3. But has already been shown twice, as long as interest rates are at artificially record low levels, quantitative easing will only help the economy for as long as it continues.
For more see Ben Bernanke and Federal Reserve Cause United States to Lose AAA Credit Rating
Federal Reserve Preventing Job Growth by Keeping Interest Rates Too Low
Real Questions for the Federal Reserve
Is Silver Still a Good Investment?
Why Congress Created the Federal Reserve
How the Federal Reserve Caused the Great Depression
How the Federal Reserve Caused WW II