Anyone who walked through the former Occupy Boston encampment at Dewey Square was confronted with the sight of tents, colorful signs, deep political discussions and the long, ominous shadow of the Federal Reserve Bank of Boston.
The Fed appeared as an easy target for Occupy, epitomizing the powerful non-democratic institutions that the Occupy movement is struggling against. Yet the problem is not the Federal Reserve, but who controls it.
Calling to “End the Fed” is to believe in a magical cure-all for the problems that the society faces. Proponents of “End the Fed”, such as Republican presidential candidate Ron Paul, argue that the Fed is another example of big government intervention in the economy that hurts private business and prevents an economic recovery. Paul believes businesses profit best when left alone, despite evidence that crises are inherent to the very nature of the system itself. Far from causing periodic crises of capitalism, government intervention is required to mitigate them.
Supporters of Ron Paul believe that because he attacks the Fed he is a friend of the 99%. On some issues, Paul does seem to be on our side, such as when he calls for an end to war (both abroad and on non-violent drug users at home). When it really counts, however, Paul is on the side of the 1%.
Ron Paul wants to end taxes for corporations, eliminate safety regulations for workers, and roll back the Civil Rights Act to allow businesses to discriminate. In Paul’s view, private property trumps human rights.
But he is wrong about these issues, and he is wrong about the Fed. Abolishing the Federal Reserve would create utter chaos for the U.S. economy.
The Federal Reserve was created by the United States government in 1913 to provide a central bank to help regulate our massive economy. An economy the size of the U.S. economy needs a central bank.
Generally, the role of banks is to provide credit to businesses in order for them to invest and generate profit. Sometimes private banks don’t have the money they need to match the demands of businesses. This is where the Federal Reserve steps in. The Fed sets monetary policy for the United States by controlling the money supply to influence interest rates in order to promote economic growth.
The Fed creates its own money which is then loaned out to private banks. This money can then be used to stimulate investment which should spur the economy. Currently though, banks have plenty of money, but they are not lending it out.
Many critics of the Fed believe that the creation of money will lead to runaway inflation. This criticism is unfounded. Inflation has remained low since the crisis began, hovering around 3%.
Arguably, the Fed is the only major institution currently keeping the U.S., and the global economy, from sliding into depression. In Congress, Democrats and Republicans have been deadlocked over fiscal policy, unable to decide whether or not to raise taxes and increase government spending to influence the economy.
Ultimately the problem isn’t the Fed, but who controls it. The Fed’s current policies have prevented the slide of the U.S. into a depression, which has saved the 99% from sinking into utter destitution. According to the March/April 2011 Issue of Dollars and Sense, the Fed has bought up assets such as mortgages from smaller banks that were not bailed out by the government. So, there is a good side to the Fed’s activities.
On the other hand, the Fed is not transparent nor is it accountable to democratic control. To give just one example, Bloomberg Newsweek reported on November 28 that “the Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day.” In October, a report by the Congressional Budget Office highlighted not only this lack of transparency, but that national banks have more than their fair share of control over our country’s monetary policy.
That the Fed serves as an instrument of our country’s ruling class is a dire problem in need of serious system reform. The Fed itself, however, need not be the object of our collective disdain. What we need is to make the Fed democratic, accountable, and sensitive to the needs of the 99%.