The Federal Reserve - Essay Example

FEDERAL RESERVE Over the last few years, as the economic crisis spun out of control, a great deal of attention attached to the Federal Reserve. Many people criticized its policies and suggested that it was responsible for the mess that the country was in. But as this Fortune article shows, these critics did not approach the issue from the same side. Both the left and the right attacked the Fed, suggesting on the one hand that it was too greedy and on the other that it was stifling and manipulating markets. It is important to put the Feds current situation in context. Many economists believe the Credit Crunch crisis began because of a big asset boom in the United States. Banks and other lenders gave away many loans at very low interest rates to people who simply who could not afford to pay back the money. In the beginning this led to a huge boom in housing prices because there were so many buyers in the housing market and there was a high demand and a somewhat low supply. However, eventually what happened was that people began to default on their mortgage payments. During the boom years many complicated financial products involving mortgages were bought and sold by banks and it was difficult to know how many of these "toxic mortgages" were actually on a banks balance sheet. This process is only now being corrected and improved. Some people say that the actions taken by the Fed to pump money into the economy helped make the problem less severe. However, critics such as Paul and Sanders believe that the whole problem came about because of the Feds previous policies and actions. They think that American monetary policy is deeply flawed and will not improve the economy any time soon. Ron Pauls libertarian attitude is the more convincing of the two positions. More than ever before, Americans are living in a Nanny State. A Nanny State is on that uses excessive state controls, for example, lots of unnecessary laws, to restrict its citizens’ freedom. It believes that it knows best and that citizens should follow its morality. Of course, there is a general feeling that certain things are wrong and should be discouraged or criminalized, but for proponents of the Nanny State, the government should seize control of actions and issues where there is no consensus and unilaterally impose its view of morality on these issues. Only Libertarians stand up against this kind of things. They say that people should decide what is best for themselves. They dont want the government running their lives. Sometimes the government is like the parent of a 25-year-old still telling their “child” what to do even though their “child” has grown up and his leading their own, responsible life. For Paul, the unaccountable Fed, is the government interfering in normal markets and telling markets what they can and cannot do. Fiat money, created by the government but not backed by anything is a form of tyranny.            Why is this happening more and more these days? The answer to this question is not easy to uncover. But many experts believe that in an increasingly complex world people are more willing to turn over power to the government in order to make their own lives easier. There is a sense the world can be and should be completely ordered and that government is the right body to do this (Lester 90). This is an unfortunate state of affairs as it tips the important balance between liberty and order far to the side of order. Libertarians do their best to stand up against this way of thinking. The Fed, for them, is a symbol of all of this. Sanders view is less complex. He simply does not like capitalism. He is a self-described socialist. While these people will always have a voice in America, their criticism is not sophisticated. The problem with the Credit Crunch was not an inherent problem with capitalism, but with inefficient and nontransparent markets. Paul and his associates address this issue, Sanders simply rails against the whole system. The time has long gone when socialists could hold a credible perspective on the American market. Indeed, people like Sanders were proclaiming the “Death of Capitalism” at the beginning of the crisis and suggesting that a new world order lay ahead. In truth, capitalism is here to say—we just need to fix it up. As Easton notes in her article, “For years Pauls warnings were largely ignored. Now, he blithely notes, conditions have changed.” The truth is that the whole country is underwater due to banks lending practices and debt is soaring. The Fed, according to both Paul and Sanders wasnt keeping its eye on the ball. It was allowing banks to get away with very lax lending standards and building up massive debt to capital ratios. Interestingly, in terms of politics, Sanders position is not well represented in the current scene as the Mid-Term elections approach. Most of the ire directed towards the financial system comes not from the left, but from the right. The rise of the Tea Party, in many ways inspired by Pauls earlier presidential campaign, is a right-wing movement, and seeks to remove a great deal of power from the Fed, to deregulate, and get America back on track. Indeed, Pauls son, Rand, is currently running as a Tea Party candidate in Kentucky. The Tea Partys ranks are swelling and they will likely have a significant influence on the coming election. People are railing against elites and those who make important decisions for their own benefit. While Sander and his ilk criticize capitalism, the right suggest that capitalism is great, but that it has become to centralized in the hands of a few bankers. They want to return it to the people. This is a populist message that has a vast audience in America today. People are not happy with the current system. The Fed, from its point of view, thinks that it is a victim of circumstance. The Chairman, Ben Bernanke, would argue that the actions the Fed took, actually saved the country. It is hard to prove a negative sometimes though. Whatever the Fed did during the crisis, they must take some responsibility for financial climate in the years earlier. They permitted things to get out hand in the first place. In general, it makes sense to ignore most of Sanders criticism and take some of the less extreme views of Paul into account when reforming the Fed in the future. This whole controversy could have been prevented if the Federal Reserve was more honest with the American people and more clearly explained what they were doing with taxpayers money. The people who run the Fed think they are doing a service to people, mandated by Congress. The truth is that their power has been expanding for far too long. People wouldnt complain about the Federal Reserve, so long as it did its job properly. However, many Americans see a type of collusion between Wall Street and the Fed. Many of these people come from the same background and went to the same schools. They have trouble communicating to ordinary Americans why an $800 billion stimulus package is necessary. Communication is key in a crisis or else people get very worked up and angry, as do politicians and media types. The key in the future is for the Fed and bailed out companies to clearly explain what they are doing with taxpayer’s money. Only in this way can we improve the situation. Works consulted Ayer, Bridget. “AIG Bailout.” Get Smart Blog. March 18, 2009. http://www.thegetsmartblog.com/2009/03/aig-bailout-bonus-debacle/ Lester, J.C. Escape from Leviathan: Liberty, Welfare and Anarchy Reconciled. Basingstoke, UK/New York, USA: Macmillan/St Martins Press, 2000. Shelp, Ronald Kent. Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG. Hoboken, NJ: Wiley, 2006. Schneiderman, R.M; Philip Caulfield, Celena Fang, Elisabeth Goodridge and Vikas Bajaj (2008-09-15). "How a Market Crisis Unfolded: Some of the key events in the upheaval." New York Times. Read More