Should we abolish the FED?
Table 4: United States historic CPI inflation rate, Bureau of Labour Statistics (US)
Importantly, the US is arguably the world's leading economy as measured by GDP, which totals $19.39 trillion. The world markets rely on the stability of the dollar since it plays the role of the world's reserve currency. Any uncertainty about the position of the dollar, the stability of the monetary policy management by the FED, and the lack of the FEDs direction in setting the interest rates for the US economy would have the potential to not only lower the competitiveness of the United States but even destabilize markets worldwide. The most significant function which no-entity fulfils effectively when the free market replaces monetary policy is that of the lender of the last resort. Short liquidity and general depreciation of privately issued assets incentivize investors to shift from private commercial paper to government bonds. In such a scenario a central authority is needed to restore market psychology. (Aliber and Kindleberger 2005). Whilst, specific circumstances require congressional approval, the FED is uniquely positioned to quickly provide the necessary liquidity through loans or the arrangement of large-scale asset purchases. Only a central authority with monopoly control over the fiat system can fully restore credit markets confidence. Reversing recession via the FED is first, faster, and second, provides psychological force unfound in liquidity injections organized by private consortia. Indeed, as stated by Walter Bagehot, the father of central banking, 'Substantial loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain' (Bagehot 1873). The FED fulfils its key function well, as it has shown numerous times. For instance, under Greenspan in the 19 October 1987 crash, over the 1997 Asian Financial Crisis, as well as in brokering the safe collapse of Long-Term Capital Management. The FED, and indeed central banks, are therefore necessary to safeguard the U S and indeed the world’s economy against liquidity freezes. In 2008 under Ben Bernanke, the FED became a direct lender to business. It spent over $4.5 trillion by the end of the QE1, QE2, QE3 and QE4 programmes, which massively increased the FEDs assets but helped prevent a crisis that would have been comparable in scale only to that of the Great Depression. It is indeed hard to imagine the levels of unemployment and the complete collapse of the financial system that were so close in the 2008 crisis and that could have occurred had it not been for the FED.
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