For the first time in decades, the Federal Reserve has been playing a non-negligible role in the presidential race. Candidates in both parties took turns criticizing the Fed for either not doing enough to fix the economy, or for going far past its scope and putting the economy at risk.
But moving beyond political stump speeches—and, for that matter, conventional thinking among economists—the question should still be asked: Does the Federal Reserve even matter? Here author John Tamny explains the thinking behind the title of his provocative new book, “Who Needs the Fed?” (Encounter Books, May 24).
Jared Meyer: I want to start with your conclusion. You write, “End the Fed? With great haste,” (emphasis in original), but then you go on to explain why ending the Fed will not “get us out of the woods.” Why did you build up Ron Paul’s “End the Fed” supporters, only to tear down their hopes that the Fed is the source of all our economic ills?
John Tamny: I had to build up Ron Paul’s supporters only to douse their hopes a bit simply because I think all the focus on the Fed misses much greater governmental threats to growth.
About the Fed, end it with great haste simply because it serves no useful purpose on its best day. Think about it. It was formed over 100 years ago as a “lender of last resort” for solvent banks, but the act of solvent banks approaching the Fed for loans is unheard of. It is because banks with good balance sheets don’t need the Fed. Only the insolvent approach the Fed for funds, and those institutions should be allowed to go under so that they can be acquired by better owners.
The Fed has had nothing to do with the horrid—and economy-sapping—devaluations of the dollar that have the central bank’s critics so riled up.
Bank regulator? As 2008 reminds us, not to mention that the Fed has bailed out Citibank five times in 25 years, the Fed isn’t so hot as a bank regulator. What about its attempts to set interest rates? We quite simply don’t need it for that. An interest rate is a price that factors in the infinite needs of savers in concert with the similarly infinite needs of potential borrowers. Interest rates can’t be planned. Central bankers couldn’t possibly possess even a fraction of the information necessary to credibly set them.
But we aren’t out of the woods if we simply end the Fed. This is because much of what the Fed’s critics despise it for is not its fault. The Fed is said to have devalued the dollar 93 percent since 1913. The obvious problem there is that the Fed is not charged with setting the dollar’s exchange rate value.
Indeed, the first devaluation of the dollar after the Fed came into existence was in 1933. President Roosevelt ordered it. The Fed had nothing to do…