bank rates

5 Reasons Why the Federal Reserve is a Failure!

federal-reserve.gif No single quasi-private institution has as much influence on the worldwide economy as the Fed, and as a leader can head this institution for an indefinite term, no one man is as influential on the markets as the Fed Chair.

The Dollar has plummeted in the currency markets and shows few signs of recovery or even stabilization. The new style and policies that accompanied Bernanke into office have made the Forex markets more volatile than ever and even more difficult to predict. An examination of what has gone awry can help Forex traders understand this new era at the Fed.

1. The Fed ignored the signs
The Fed has stated that it will never act as a regulator in any financial market, but it has the duty to use its influence for reform when it sees signs of consumer exploitation. Since as early as 2001, at least two senior officials inside the Fed urged its board to call for tighter regulations in the housing markets, especially in abuses that were clearly evident in the handling subprime mortgages. At the time, the White House was singing the praises of America’s new society of ownership, so the Fed took this cue and did nothing.

These deceptive loans were making possible the dream of home ownership to millions of Americans, even to those who could not come close to affording it. Now these same Americans are living through a nightmare of foreclosure and debt, much in thanks to the Fed’s willingness to ignore long-term repercussions and revel in immediate accomplishments, no matter how hollow and transitory they might be.

2. The Fed did too little too late
Other than advocating for reform, the Fed should have fully committed to a strategy of lowering target interest rates. Instead, Bernanke procrastinated, and when he did finally announce a cut, it was insufficient and ineffectual, at best. On December 11th, the Fed dropped its benchmark rate by a quarter of a percent rather than the half of a percent that had been called for by analysts and investors. Wall Street promptly responded, as the Dow plummeted nearly 300 points in one day.

The Fed might argue that this cut was prudent and that a more drastic cut would have unnecessarily fueled a rise in inflation. However, many view the Fed’s temerity in this matter as merely an extension of its inertial proclivity towards inaction.

3. The Fed kept interest rates too low for too long
Though this may seem to contradict the statements above, one of the reasons that the Fed might have hesitated in cutting rates is that they were already too low to begin with. Greenspan’s long tenure at the Fed was defined by a tendency to aggressively cut interest rates, which he began to do frequently in 1987 after the drastic correction in the stock market.

This initial move helped stave off disaster, but the further rate cuts of the late 1990s eventually led to the dot-com bubble. Rates should have been raised again in the early 2000s; if this had been done, the US might have avoided the furious borrowing that has led to the current credit crunch.

4. The Fed’s view of inflation is flawed
The Fed seems rather befuddled by this important economic indicator. The soaring costs of food and energy are a phenomenon is the US and worldwide, but the Fed does not take these developments into account.

The Fed’s analysis focuses on “core inflation,” which excludes a number of indices that it views as transitory, including energy and food costs. “Headline inflation,” which does take these costs into account, is favored by European economists, who view high energy prices as a long-term trend. By choosing to disregard the rising costs of a barrel of crude oil and a bottle of olive oil, the Fed is ignoring reality. Interest on a high yield savings account may outpace CPI, but does not outpace real world inflation.

5. The Fed gives gold stars to those deserving detentions
Fed policy following the recent economic slowdown has done nothing but reward those who helped caused it. The majority of financial stocks have suffered of late, and justifiably so. However, the Fed seems dedicated to bailing out even the worst of the perpetrators with the recent set of economic interventions that it has enacted.

While working to eliminate any downturn in the market might seem feasible for short-term success, it is a purely shortsighted endeavor that will hurt the economy in the long run. In order for a free market to truly exist, bear markets must coexist peacefully with bull markets. Unfortunately, the Fed has its bright orange vest on and is going bear hunting. This is a doomed outing, and one that is going to get us all hurt in the end.

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Comments (25)
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25 Existing Comments
  1. Mark Argentino said:
    on March 20th at 02:04 pm

    Good article. In point 3 above, I don’t agree that the low rates caused excessive borrowing. Greed is always in play, people just overextended themselves, just as they did in the late 80’s when interest rates were at about 12%

    All the best!

  2. Venkatakrishna Nalamothu said:
    on March 20th at 02:21 pm

    Good post and analytical one. It is too late to correct credit crisis. Federal is simply in hopeless situation.

  3. Paul N said:
    on March 20th at 05:08 pm

    Great article! Many now say abolish it. The fed never really did much to begin with, not to mention it is neither “federal” no is it a Constitutional entity. The devaluation of the dollar since 1913 speaks for itself.

  4. suziee said:
    on March 20th at 06:38 pm

    nice article, can i put it in my blog ? i will give backlink

  5. Bankaholic said:
    on March 21st at 02:45 am

    Suziee, yes, please put it on your blog and spread the word about our horrible monetary system.

  6. Julia said:
    on March 21st at 05:42 pm

    Please keep these excellent posts coming. Thank you.

  7. Dr. Gary S. Goodman said:
    on March 21st at 06:08 pm

    With oil prices soaring and more resources headed to duplicitous regimes and to their terroist parasites, we’re doing something rational: We’re devaluing the currency. The Fed is paying lip service to fretting over inflation. Through bailouts and rate cuts it is promoting inflation. What’s missing from our national policy, Fed aside, are two things: (1) A meaningful incentivizing of alternate fuels and conservation; and (2) Cashing in the Iraq invasion “bonus.” What’s that? Whether we went to war for oil is moot. Now, we’re in a war for oil, and we need to assure our supply as we pursue alternatives.

  8. Rick Cain said:
    on March 21st at 07:13 pm

    Other nations control the value of their currency, we entrust its value to private banks, the same ones that are beginning to drop like flies because they invested in stocks backed by mortgages.
    Oil is neither in short supply nor expensive, but our “free market” system requires we pay $100 a barrel for it. The “Dictator” in Venezuela charges $0.12 a gallon for gasoline for his oppressed people. Obviously we are getting ripped off by privately run oil, and don’t blame taxes, which are only about 15% of the cost of gasoline.

    The final failure is the fed’s dropping of interest rates, causing CD prices do drop, discouraging investment capital which is exactly what banks need at this point in time!

  9. Richard T said:
    on March 22nd at 12:33 am

    Thanks for letting me know about your posts. It is a very good article. To para-phrase. it’s to little and to late.

    Who knows, maybe one day the feds will catch on.


  10. Forex Articles said:
    on March 22nd at 04:04 pm

    Interesting article, it’s hard to argue with the points you make. I’ve linked to it from my blog if that’s okay.

  11. Helen said:
    on March 23rd at 03:10 am

    Thank you James. I am glad you liked the article. Thanks for the link too.

  12. Mark dela Paz said:
    on March 25th at 02:02 am

    Very well written and something I generally agree to. Thanks for bringing this to my attention, I’d be sure to mention it in my lectures.

  13. timotato said:
    on March 26th at 03:56 am

    Maybe I’m pessimistic but it seems clear to me that your point number 6 should be “The Fed doesn’t give a darn about us because it’s a private entity”. David Rockefeller and his cabal have been playing us for fools. There’s no mystery why the Fed hasn’t “kept on top” of our economic situation. They knew the sub-prime loans stank and sta back and watched the result. They’re shaking out the weak & greedy then buying them up at bargain prices. The fact that, even though Chase had agreed to buy Bear Stearns, the Fed STILL kicked in $30B…for a private unregulated firm!… thus issuing Chase a $30B unnecessary and unneeded gift of OUR MONEY. In essence David Rockefeller just gave himself a gift of our money. The word “quasi”, as in quasi private, doesn’t mean jack when it comes to greed and making money. THE FED IS A PRIVATE FOR-PROFIT FIRM, folks!!!!! It only looks out for us when our interests are in common.

  14. J Munch said:
    on April 17th at 07:50 pm

    One of the biggest things the Fed does not get is the fact that lowering rates causes bank CD rates to drop dramatically. Huge numbers of Americans count on their safe CD income for their daily living expenses. As a Bank Manager I see the disappointment every day as customers come in to check rates or roll over a maturing CD. Rising inflation and lower interest income equates to a lot of people pulling back their spending. That will all make this whole mess even worse as all these high rate CD’s roll over during the next 12 months. So the Fed continues bailing out the big stupid lenders while the little guys are hammered from all directions.

  15. Jason P. said:
    on May 2nd at 06:54 pm

    Got your message a while back…finally got around to reading and responding to mail. Yep, we really do live in a world run by a very elite group…of idiots.

  16. Doug said:
    on February 3rd at 05:19 pm

    Sometimes this is even more interesting to go back and read.

  17. Internet Marketing IQ said:
    on February 10th at 11:17 pm

    The average person has no idea that the Fed releases money buy purchasing debt obligations from the Federal Government. Every single dollar “given” in the bailout scenario has debt attached to it. And who pays those debts? You do!

  18. Shaun said:
    on February 26th at 07:43 pm

    It’s quasi private sure… but controlled almost completely by the government with government appointments. It’s still all politics, ladies and gents.

  19. sandrar said:
    on September 10th at 05:45 pm

    Hi! I was surfing and found your blog post… nice! I love your blog. 🙂 Cheers! Sandra. R.

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    on December 3rd at 05:27 am

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  21. Chris said:
    on December 3rd at 08:25 am

    love this article,thanks for sharing

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    on January 12th at 06:22 pm

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  23. Enlightenment Forex said:
    on January 15th at 06:14 pm

    Just bookmarked the post! Very infomative!

  24. Ky Cheng said:
    on February 21st at 05:44 pm

    Right, but now they’re talking about raising interest rates, but nobody knows if now is the right time to start.

  25. winnie84 said:
    on July 7th at 04:11 am

    Thanks for posting. Hope government can improve credit crisis.