Ron Paul, the Federal Reserve, and hand grenades

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.

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
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One Response to Ron Paul, the Federal Reserve, and hand grenades

  1. Kenneth J. Ciszewski says:

    There is no question that the Fed gave too much to business in the way of super low interest rates on money that banks borrow from it, and that that action contributed to various “bubbles” since the late 1990s. Even Alan Greenspan finally admitted that he had made a mistake in believing that markets were “self-regulating”. Mr. Greenspan obviously has never worked in a real business–any one who has knows better. Competitive entrepreneurs work to obliterate their competition, become king of the hill, and try to walk off with all of the money. There’s nothing “self-regulating” about that!!!

    As for Congress regulating the economy, they do somewhat anyway, although what they do changes with the political winds as opposed to a long term vision of what is good for the country.

    For example , the credit default swap problem that occurred in the last couple of years was caused by the private sector, although, it turns out, these were illegal at one time because similar devices caused a serious economic downturn around 1905, when they were outlawed. Of course, more recently, that law was rescinded by Congress, leading to the recent debacle. So much for regulating commerce.

    If the FED had not lent money to banks in the US and around the world, the world economy would have collapsed during the recent crisis. I know, bailout is a dirty word, but if you don’t like 10% (probably really 20%) unemployment, try 30% (50%??!!) unemployment and the complete collapse of the world economy. There would have been riot in the streets all over the world!!

    The Fed also helped deal with the famous October 1987 drop of the stock market (which looks pale in comparison with the recent crisis) by guaranteeing liquidity during the subsequent trading day so the market would not collapse further. This required quick action. Congress would have debated that to death, while the disaster continued.

    Mortgage rates for home loans are currently at record low levels–this is obviously due to market forces. The Fed really has little or no control over these rates–they are set by worldwide bond market forces.

    Borrowers and lenders can still negotiate the price of money if they want to, but some of the price is determined by global market forces.

    As for the Fed dealing with the labor problem, that was never part of their charter anyway–that’s Congress’s responsibility, and look how well that’s gone–we have tax breaks for companies who ship jobs over seas!! No wonder tax revenues are so low–people who aren’t working don’t pay much in taxes. In effect, Congress not only didn’t stop business from shipping jobs overseas, they encouraged it, and allowed the tax base to go with the jobs!!

    As for being trained for better paying jobs, except for information technology, the better paying jobs appear to be those held by CEOs and officers of big companies, and frankly, there aren’t too many of those to go around. The joke going around among electrical engineers in the 1990s was that engineering was a great field to get into to get out of–get an MBA in addition, and get paid more, because engineering pay plateaus badly at some point. We really don’t pay engineers well relative to sales people and company officers. Look at the Wall Street bonuses again this year. All these people did was move money around. That adds very little value to the economy and virtually no jobs, and yet these geniuses that almost wrecked the economy recently are getting paid huge sums. Congress needs to go back and regulate that. None of those Wall Street types deserve more than we pay the President of the United States–about $400,000 per year plus a good health plan. If they don’t like being limited to that, let them join the people they helped put on unemployment!!!

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