A profile on U.S. Representative Ron Paul, Republican of Texas, caught my eye in this morning’s The New York Times. Mr. Paul is known for his libertarian views and particularly his dislike of the Federal Reserve. Over the past few months I have grown to share his sentiments.
The creation of the Federal Reserve is one of the examples of the U.S. Congress shirking its responsibility for managing the economy. Congress regulates commerce including the market for loanable funds. I have not yet seen a strong argument for why the setting of interest rates should not be made in the market where borrowers and lenders negotiate the price of money.
The last decade should provide a casebook study on how artificially low rates set by the Federal Reserve encouraged lending to a consumer that has seen no real increase in their wages over the last decade. In addition, the prospects for these consumers to increase their incomes are low partially due to better use of technology by business and an underlying structural change in demand for labor where consumers are not prepared for higher paying jobs.
The Federal Reserve ignored this problem with labor, basically giving a hand grenade to a consumer that could barely use a slingshot.