Real Questions for the Federal Reserve

Watching the first ever Federal Reserve press conference on 4-27-2011, the financial media clearly displayed, as usual, their complete incompetence. The media had a golden opportunity to get some clear answers from the Fed, but not one real substantive question was asked. Here are a handful of substantive questions that quickly come to mind.

Real Questions for the Fed

How many assets did the Fed sell prior to the financial crisis, and didn't those sales cause the crisis by draining liquidity out of the economy?

How much inflation did the United States experience from 1790 to 1913? And how much did we experience from 1913 to today? If the Fed really wants to prevent inflation shouldn't you close up shop?

Why won't the Fed let the free markets in this country work?

Do you understand how you are centrally planning US economic growth?

What is the role of the Fed as defined by the Federal Reserve Act?

In a moment I will go into further detail regarding these questions. First I'll present some background about myself and my knowledge on the subject.

When Ben Bernanke took over as Federal Reserve Chairman back in 2006, I wrote him a letter warning him that if the Fed persisted upon the policy it was currently pursuing at that time, the Fed would end economic growth and wreck the economy. Bernanke's response was comical. He sent me a letter saying he was following the policy that Congress had dictated for the Federal Reserve. If I had a problem with that policy, I should take it up with Congress. Really?

In what document regarding the Federal Reserve did Congress say it was the Fed's duty to cause a massive financial crisis in the United States and around the world? Where did Congress tell Bernanke and the Fed they had to put millions of Americans out of work and cause double-digit unemployment? Somehow I missed those directives to the Fed from Congress. Bernanke's response to me was ludicrous, and after dealing with Congress for five years, even he would probably laugh at the sheer idiocy of that response.

In November of 2007, I wrote about how the Fed's policies were going to cause deflation, Are We Headed for Deflation?, and wreck the economy in the United States, if the Fed did not change course. The Fed did not change course, deflation occurred, and the economy was ruined. What is important to note here is that the Fed could have changed course and prevented the economy from derailing at any time. Had they done a QE at that time, the economy would have stabilized, and economic growth would have continued.

In 2008, I attempted to contact FOMC members and tell them they had to create liquidity in the economy to end the crisis. I also contacted Secretary of the Treasury Hank Paulson, and told him the Federal Reserve had caused the crisis by purchasing nearly $750 billion dollars of assets in the economy in the preceding years. Paulson tried to end the crisis by creating the $750 billion dollar TARP fund. Paulson had the right idea, but as I explain in Why TARP Doesn't Work and How To Make the Obama Stimulus Plan Work, he could not replace lost money from the economy with borrowed money.

In January of 2009, I started writing articles telling the Federal Reserve how to end the crisis; How to Make Home Prices Go Up, The Fed is Shockingly Clueless, Four Sure Fire Ways to Fix the US Economy and Yes There is a Magic Bullet to Fix the US Economy. My theme in all the articles is the same. The Fed had to buy assets, creating liquidity, to end the crisis.

Eventually the Fed did exactly what I said they had to to do, create liquidity in the economy by buying assets, and the crisis ended. Economic growth reappeared, but job growth has been very slow. I explained why that it so in another article, Low Interest Rates Cause Low Real Economic Growth.

Back to the five substantive questions I quickly thought up for Ben Bernanke at the Federal Reserve's first press conference, and why the questions are relevant.

1. How many assets did the Fed sell prior to the financial crisis, and didn't those sales cause the crisis by draining liquidity out of the economy?

The answer is that the Federal Reserve sold roughly $750 billion dollars of assets prior to the financial crisis. By selling those assets the Fed drained liquidity out of the economy, as the buyers of the assets paid the Fed cash for the purchases. The Fed kept the cash, thus draining the economy of liquidity. By draining the liquidity out of the economy, the Fed caused a liquidity crisis and that caused the economic crisis.

2. How much inflation did the United States experience from 1800 to 1913? And how much did we experience from 1913 to today? If the Fed really wants to prevent inflation shouldn't you close up shop?

From 1800 until 1913, the US dollar lost no purchasing power. Zero, nada, nothing. In 1913, you could purchase at least as much goods and services with a buck, as you could in 1800.

From 1913 until today, the US dollar has lost 95% of its purchasing power. A $1 cup of coffee today, would have cost you a nickle back in 1913. What happened in 1913? The Federal Reserve was created by Congress. The Fed has destroyed 95% of the dollar's value in under 100 years.

So, if the Fed really wants to prevent inflation, the solution is simple. Close yourself down. Without an independent money creating government institution, we will never have inflation.

3. Why won't the Fed let the free markets in this country work?

When lenders and borrowers get together in the United States, the rate of interest charged and paid is essentially dictated by the Federal Reserve.

4. Do you understand how you are centrally planning US economic growth?

By essentially determining the rate of interest charged by lenders and paid by borrowers, the Federal Reserve is centrally planning economic growth in the United States. Great Depressions and Great Recessions are the results of central planning. (This is more complicated an issue than that, but that's all I'm going into here)

5. What is the role of the Fed as defined by the Federal Reserve Act?

The Federal Reserve Act created the Fed back in 1913. The first sentence states the Fed was created to "furnish an elastic currency", and to "better supervise the banking industry" in the United States. How has the Fed done in both regards?

Inflation and Crime Rates

If economics interests you, perhaps you'd also be interested in two more articles of mine that explain the connection between inflation and crime rates. In Why Crime Rates Rise and Fall, I explain the connection. In Real Reason Why Crime Rates Keep Dropping Even With Higher Unemployment and Recession, I explain why crime rates did not rise during the economic crisis.

Recently, crime rates have started to rise sharply in places like Newark, New Jersey. Whether or not the rise in crime rates in Newark is related to inflation or to massive layoffs of police officers due to budget problems, is yet to be determined.

Inflation and Investing

Investors must take inflation into consideration when investing their money. Any investor who listened to the advice I gave two years ago in Why Silver Can Make You Rich, would have nearly quadrupled their money in silver. I recently wrote a follow up article on the subject, Is Silver Still a Good Investment?

For more see How the Federal Reserve Caused WW II

How the Federal Reserve Caused the Great Depression

Why Congress Created the Federal Reserve