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Thursday, September 20, 2018

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Federal Reserve contributes to real economic crisis


The economy is the most vital part of a country’s stability.

A good economy will create jobs, lift median income and grow the GDP, so it is extremely important that no one—politician or bureaucrat—makes decisions that will ultimately afflict it.

Today’s economists are hell-bent on scientific experiments where they form a hypothesis that is theoretically accurate, collect data, analyze said data and generate results that either confirm or deny their hypothesis.

After this, the goal is to enact policy to help stimulate and/or grow the economy.

The experiments are fine and dandy until economists use them to find patterns to predict the future. This can be considered the real economic crisis. Simply put, there are too many variables and uncertainties to accurately predict an outcome.

These predictions have significant impact on the policy decisions of elected officials. Entities such as the Federal Reserve have an immense amount of influence on financial markets, as well on the political spectrum.  

In the Wall Street Journal article “Three Economists Walk into a Bar,” James Mackintosh discusses the shortcomings of modern day economists. Mackintosh writes, “This is where the biggest difference from meteorology comes in: Weather forecasts don’t change the weather, but economic forecasts can change the economy.”

When Janet Yellen hints that the Fed is going to raise rates during the next FOMC meeting, the market reacts. If the presidential election favors someone harder on fiscal policy, the market reacts. For example, when Donald Trump won the presidential election, the initial market reaction was a catastrophic start, followed by a strong close.

The point is that economists need to get their noses out of policy making and allow the markets to stimulate themselves.

Any person who has studied high school science knows that every action has an equal and opposite reaction. The same concept applies to the economy. If an economic entity such as the Fed props up the economy, the economy will eventually fall the same length. This can be said when we enter boom and bust cycles.  

In the shortest possible terms, a boom occurs when a particular industry is artificially inflated by either the Fed or another governing body. When that artificial boost becomes unsustainable, it deflates hard; example: the 2000 and 2008 crises.

At this point, either the Fed cannot see the bubbles coming, or it’s allowing them to occur intentionally. The Peter Schmidt article, “Do Central Bankers Know a Bubble When They See One?” discusses how the Fed misuses their capabilities and ultimately breaches its intended purpose.

Schmidt writes, “Senior Fed officials taking positions diametrically opposed to positions Alan Greenspan claimed formed the basis for the Fed’s policy toward bubbles, namely, allowing bubbles to burst and dealing with the consequences later.”  

This means that the Fed aims to be incredibly shortsighted. It chooses to make the economy look good at the moment and deal with the consequences after the fact. The issue is that the American people are the ones who shoulder those consequences, not the Board of Governors. 

The greatest piece of advice comes from within the Fed itself. The Fed needs to get their fingers out of the market. They need to raise interest rates back to their natural rate, 5 percent, and let the economy adjust on its own—let the country heal.

Although the sixteen-year economic stagnate is largely over, it will not return to its natural state unless the Fed and modern-day economists back down.

Opinion columnist John Brucato is a economics senior and can be reached at [email protected]

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