As Ben Bernanke looks to greener (as in Ivy) pastures, critics are lining up not only to knock his policies, but also to question the very need for the Federal Reserve.
The central bank — soon to celebrate its 100th anniversary — has painted itself into a corner with its quantitative-easing program, which has only perpetuated the economic malaise from the Great Recession.
In fact, many point to former Fed Chairman Alan Greenspan’s easymoney policy as the trigger of the subprime crisis that precipitated the cratering of the economy in 2007.
“It’s been an unmitigated disaster. The history of the Fed is the history of the decline of the United States,” says Peter Schiff, chief executive of Euro Pacific Capital. “I am not going to blame it all on the Fed; there are other factors. But the Fed had an integral role in the gradual decline of American civilization.”
Schiff cites the devaluation of the dollar as evidence of the Fed’s duplicitous actions.
“If you look at the value of the dollar today to where it was 100 years ago, the dollar has lost 98 percent of its purchasing power since the Federal Reserve was put in charge,” Schiff asserts. “And if you look at the dollar’s purchasing power 100 years prior to the Fed, the dollar gained — maybe doubled. The dollar was more valuable in 1913 than it was 1813.”
“If you say the goal of the Fed was to prevent calamities, then you have to say that it has been a failure,” says William A. Fleckenstein, a hedge-fund manager and the author of “Greenspan’s Bubbles.”
Fleckenstein says he’s seen two financial bubbles over the past quarter-century. He also believes that, under the Fed’s system of easy money with near- zero percent interest rates over the past few years, “the Fed is once again creating a bubble.” The Fed should be abolished, he adds, because it has no accountability for its mistakes.
While urban legend says the Federal Reserve is under a 100-year charter that expires on Dec. 23 this year, it in fact has a perpetual charter and can be abolished only by an act of Congress.
The Fed began a century ago with the goal of protecting the dollar. It was given the exclusive right to create money in 1913.
The Fed would “provide a means by which periodic panics, which shake the American Republic, and do it enormous injury, would be stopped,” according to Robert Latham Owen, one of the authors of the original Federal Reserve Act.
Economist Laurence Kotlikoff of Boston University says he’d give the Fed a grade of “C” in its first century.
“It didn’t prevent the Great Depression or the Great Recession. It hasn’t fixed the core problems: opacity and leverage in the banking system,” Kotlikoff said.
“Central banking has a poor record but other methods do, as well,” adds Jeffrey Gundlach, CEO of the DoubleLine funds.
Gundlach, who has been very critical of cheap-money policies of the Fed and predicted the crash of 2008, believes the government should balance the budget first and then consider the Fed’s future.
“The Fed is an instrument of crony capitalism,” warns Hunter Lewis, a money manager and the co-founder of Cambridge Associates, an investment-advisory firm.
“Centenarians garner unconditional praise, whether their lives are great or mediocre: Surviving 100 years is praiseworthy. Not so for regulatory bodies, for which praise, even at their centennials, comes only by earning it,” says former SEC Chairman Harvey Pitt. “Until 2007, the Fed deserved its stellar reputation. But its centennial comes after policy failures led to the 2007-08 economic collapse, and its inattentiveness allowed the collapse to reach crisis proportions.”
Rep. Kevin Brady (R-Texas), chairman of the Joint Economic Committee and senior member of the House Ways and Means Committee, says, “In this global economy, a central bank is absolutely essential. But on this 100th anniversary of the Fed, and given the financial crisis we’ve just come through, this is the opportune time to both evaluate the Fed’s performance over the last 100 years and to bring together some of the best minds on identifying what the Fed’s role is going forward in making recommendations to Congress.”
Brady introduced The Centennial Monetary Commission Act, “so we can have a thoughtful, constructive discussion on what role [the Fed] should be going forward.
[We are not calling for abolition of the Federal Reserve], we are calling for reforms [at the Fed] that maintain its independence.”