The Right Opinion

Prophets and Losses

By Thomas Sowell · Feb. 5, 2013

Now that the federal government is playing an ever larger role in the economy, a look at Washington's track record seems to be long overdue.

The recent release of the Federal Reserve Board's transcripts of its deliberations back in 2007 shows that their economic prophecies were way off. How much faith should we put in their prophecies today – or the policies based on those prophecies?

Even after the housing market began its collapse in 2006, Federal Reserve Chairman Ben Bernanke said in 2007, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”

It turned out that financial disasters in the housing market were not “contained,” but spread out to affect the whole American economy and economies overseas. Then Chairman Bernanke said: “It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth.”

What is an even more interesting question is why we should put such faith and such power in the hands of a man and an institution that have been so wrong before.

This is not just a question of a bad guess by Ben Bernanke. The previous chairman of the Federal Reserve System, Alan Greenspan, likewise misjudged the consequences of the housing boom and bust. Nor was the Federal Reserve's staff any more accurate in its prophecies. According to the New York Times, “The Fed's own staff still forecast that the economy would avoid a recession.”

Today, the economy has not yet fully recovered from the recession that the Federal Reserve System's staff and chairmen thought we would avoid.

We all make mistakes. But we don't all have the enormous and growing power of the Federal Reserve System – or the seemingly boundless confidence that Fed Chairman Ben Bernanke still shows as he intervenes in the economy on a massive scale.

Not only does the Federal Reserve System control the money supply and regulate banks, the Fed's willingness to keep buying hundreds of billions of dollars' worth of government bonds makes it easier for the Obama administration to keep engaging in massive deficit spending that runs up a record-breaking national debt.

The reason that the Federal Reserve can afford to continue buying huge amounts of government bonds is that the Fed is authorized to create its own money out of thin air. They use the fancy term “quantitative easing,” instead of saying in plain English that they are essentially just printing more money.

Being wrong is nothing new for the Federal Reserve System. Since this year is the one hundredth anniversary of the Fed's founding, it may be worth looking back at its history.

President Woodrow Wilson explained the reasons for creating the Federal Reserve System. He said that the Federal Reserve “provides a currency which expands as it is needed and contracts when it is not needed” and that “the power to direct this system of credits is put into the hands of a public board of disinterested officers of the Government itself” to avoid control by private bankers or other special interests.

The Federal Reserve was supposed to prevent shocks to the economy that can come from drastic inflation or deflation, and reduce the dangers that can come from widespread bank failures. These are all good goals. But what is the Fed's track record?

In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded. The biggest deflation in the history of the country came after the Fed was founded, and that deflation contributed to the Great Depression of the 1930s. As for bank failures, they reached levels unheard of before there was a Federal Reserve System.

Like so many “progressives,” then and now, Woodrow Wilson seemed to think that, if those who made government decisions had no financial interest in those decisions, then they could be trusted to wield their powers in the public interest.

But the enormous power wielded by the unelected leaders of the Fed over the economy, unchecked by the constraints of the market, has repeatedly turned out to be more than human beings can handle.

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15 Comments

Torp44 in Ione, Wa. said:

Thank you, Dr. Sowell, for the most concise summation I've seen for our current economic ills.
Unfortunately, "Our" Representatives manage to avoid any mention or demonstration of any willingness to address the Federal Reserve issue; & I don't personally hold out much hope that the "Federal" Reserve will be abolished. Our government, and we citizens, are responsible now for having alllowed this to happen over the last hundred years without correction. Now, it may just be too late.

Tuesday, February 5, 2013 at 2:42 AM

Torp44 in Ione, Wa. said:

Thank you, Dr. Sowell, for the most concise summation I've seen for our current economic ills.
Unfortunately, "Our" Representatives manage to avoid any mention or demonstration of any willingness to address the Federal Reserve issue; & I don't personally hold out much hope that the "Federal" Reserve will be abolished. Our government, and we citizens, are responsible now for having alllowed this to happen over the last hundred years without correction. Now, it may just be too late.

Tuesday, February 5, 2013 at 2:43 AM

Howard Last in Wyoming replied:

Jim, you have it correct. Article 1, Section 8, Clause 5 gives Congress control of currency. What section of the Constitution authorizes Congress to give this power away to an un-elected group that meets in secret?

Tuesday, February 5, 2013 at 6:34 PM

Torp44 in Ione, Wa. said:

OOPS!!

Tuesday, February 5, 2013 at 2:43 AM

jeff in texas said:

thomas,
the first thing that we must understand is that it is the feds goal is to destroy america. communism(the new world order) cannot be implemented in a successful and/or Chrisitan nation. (read the writings of antonio gramsci or the speeches of stalin)
so, the first step is to destroy a nations Christianity and its prosperity by any means, as tyranny always rises on the ashes of a collapsed system such as a failed democracy, as the mentally lazy sheep of such nation are fit for no other form of goverment.
this plague of marxist atheism is spreading, and spreading fast; and until we realize that the supremist zionist nation of israel and all of its ilk are predatory sociopaths(a little redundancy there), we will be shfiting our nation and its policies between the hands of one boshevik adherent to the next, with our future being steered into the hands of the communist beast known as the new world order. see realjewnews.com (the site of a jew) or "the occidental observer".

Tuesday, February 5, 2013 at 4:35 AM

Jayve in ABQ, NM replied:

Try spicing it up with a little more anti-semitism in your rant, putz. You defend Christianity and then sling mud at Israel. Real nice...

Tuesday, February 5, 2013 at 12:55 PM

Tod the tool guy in brooklyn ny said:

Yes, Dr. Sowell, conservatives are interested in results, ---what did we get from the F.R.S. besides another false prophet named Burn-and-see!(Bernanke)

Tuesday, February 5, 2013 at 6:26 AM

Master Gunny in tifton GA said:

Bernake and company see themselves as financial scientists, tweeking and tuning an economy which they think can be manipulated and controlled by central planners. They claim for themselves omniscience and they make decisions based on statistics which are riddled with presumptions and not-so-scientific-wild-ass-guesses (NSWAG). Worst of all they pander to the politicians and play the part of accomplice to the criminal. It never seems to occur to them that there are events and cycles of finance that are beyond prediction or understanding. Thus they yield to politics (the thing Wilson probably feared the most) in order to work in partnership with the thieves and political whores in Washington. I can't design something that would work better but I know this; the Fed is broken.

Tuesday, February 5, 2013 at 7:09 AM

PH in DE replied:

The trouble with the "financial scientists" and the politicians is they seem to think people will not change their behaviors due to changing circumstances. If someone buys steak every week and drives 200 miles a week, they will do so every week in the future. Except that when hamburger costs now what steak did last month, we buy hamburger instead. And when the price of gas goes up by leaps and bounds, we don't drive to that movie and we combine all errands we can into one big trip that uses less gas than doing smaller trips at more convenient times, so that hopefully our gas bill isn't too much more than it used to be.
I wish they would wake up to economic reality, or in fact, any reality. The La-la-land they occupy may suit them, but it makes life hell for the rest of us.

Tuesday, February 5, 2013 at 8:28 AM

wjm in Colorado said:

instead of saying in plain English that they are essentially just printing more money.

Weimar Germany all over again. The Fed lies about inflation numbers because they remove food and gas from their figures. If you don't see the direct result of the fed printing presses going non stop, what a chicken now costs (about double) versus four years ago, the cost of gas, everything, then you shouldn't be voting. Just wait till the world has enough of this money fabrication, and chooses another currency for transactions. That will be the end then, and the dollar becoming totally worthless will usher in the colapse.

Tuesday, February 5, 2013 at 9:45 AM

MB in Pennsylvania replied:

I was at a lecture by Erskine Bowles, the named Democrat of the Bowles-Simpson commission (or is it Simpson-Bowles?). A member of the audience asked him what in his worst nightmares the failure of America would look like. His two word response? "The Weimar Republic."

Tuesday, February 5, 2013 at 3:44 PM

Wayne in Hinesville, GA said:

Jeff, You are one looney Jew hater. Go peddle your BS on some other site.

Tuesday, February 5, 2013 at 12:42 PM

Wayne in Hinesville, GA said:

PH hit the nail on the head about how families react to rising prices. We fall back on the basics until the crisis is over. Unfortunatley, our government, with the aid of the Federal Reserve, just keeps on spending when in reality it should do the same thing we do, tighten our belts. The Federal Reseve is the same as the Bank of the United States that Andrew Jackson fought so hard to eleminate during his Presidency. Old Hickory finally succeeded and it put the country back on a sound financial track. We are so deep in debt now that we may never recover because of the Federal Reserve's ability to keep printing money with nothing to back it up.

Tuesday, February 5, 2013 at 12:50 PM

George Rogers Clark in Ohio said:

Dr. Sowell, I "amen" all that Jim in Lone said. Prophets, indeed! Your history and reality economics make a difficult subject crystal clear. THANK YOU.

Tuesday, February 5, 2013 at 2:02 PM

xlr8r in California said:

The evidence is obvious, outside of a military action totally controlled by the military, our government usually fails at every attempt outside of it's Constitutional authority! Bureaucracies are the governments tool for usurping the Constitution and for controlling the masses through regulations bypassing the people. The Federal Reserve, a private bank, manipulating the currency for "today's" success is just postponing the damage that has to come, "tomorrow" to correct the problem! There is no other option than the option for total economic collapse. How else can you fix something that requires a complete rebuilding from the ground up?

Tuesday, February 5, 2013 at 10:52 PM