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The Fed Doesn’t Control the U.S. Economy

Posted March 20, 2008

“The Federal Reserve has cemented its role as price fixer for short-term interest rates. It fuels speculative bubbles when the economy slows, and denies all responsibility when bubbles burst.” — Dan Amoss

by Dan Amoss

Baltimore – (TFN): The government cannot bend the economy to its will, as most economists appear to believe. The economy is infinitely complex, and instead bends to the will of billions of spending and investing choices. Yet some economists still try to tweak the economy if it does not suit a political agenda, or they try to make it “work for everyone.” Politicians advance their careers by looking at everything on the surface and ignoring the consequences of their ideas.

John Maynard Keynes, an early 20th century economist, was the most influential advocate of government influence in the economy. Thanks to him, an entire generation of voters thinks the president “manages” the economy. Keynes’ followers, who populate the halls of government and academia, think the government needs to act when the free market “fails.” They propose government solutions to problems like “liquidity traps” and “insufficient demand.”

These alleged problems became so feared that the U.S. government decided it was necessary to move the dollar to a completely paper, faith-based system — despite historical evidence that every paper money system fails. The Federal Reserve has cemented its role as price fixer for short-term interest rates. It fuels speculative bubbles when the economy slows, and denies all responsibility when bubbles burst. The cycle then repeats.

The New Deal was Keynes’ idea. The era of colossal government — the New Deal — began as a popular reaction to the Great Depression. The Depression started when an inflation-fueled bubble popped, and worsened in the mid-1930s, when the government taxed capital away from entrepreneurs and reinvested it into “make work” programs. Read on to learn why Keynes was wrong about a “managed” economy.

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