Last week, the Federal Reserve responded to
Wall Street’s coronavirus panic with an “emergency” interest rate cut. This
emergency cut failed to revive the stock market, leading to predictions that
the Fed will again cut rates later this month.
More rate cuts would drive interest
rates to near, or even below, zero. Lowering interest rates punishes people for
saving, thus encouraging consumers and businesses to spend every penny they
make. This may give the economy a short-term boost. But, it inhibits
long-term economic growth by depleting the savings necessary for investments in
businesses and jobs. The result of this policy will be more pressure on the Fed
to indefinitely maintain low interest rates and on the Congress and president
to create another explosion of government “stimulus” spending.
Boston Federal Reserve President Eric Rosengren has suggested that
Congress allow the Federal Reserve to add assets of private companies to the
Fed’s already large balance sheet. Allowing the central bank to buy assets of,
and thus assume a partial ownership interest in, private companies would give
the Federal Reserve even greater influence over the economy. It could also
allow the Fed to advance a political agenda by, for example, favoring
investment in “green energy” companies over other companies or refusing to
purchase assets of retailers who sell firearms or tobacco products.
Mr.
Rosengren’s proposal to allow the central bank to “invest,” in private
companies seems like something one would hear from democratic socialists like
Senator Bernie Sanders. This is not surprising since the entire Federal Reserve system is a textbook
example of socialism.
The
essence of socialist economics is government allocation of resources either by
seizing direct control of the “means of production” or by setting prices
business can charge. Federal Reserve manipulation of interest rates is an
attempt to set the price of money. Federal Reserve attempts to set interest
rates distort the signals sent by the rates to investors and business. This
results in a Fed-created boom, which is inevitably followed by a Fed-created
bust.
Economic elites benefit when the Federal
Reserve pumps new money into the economy because they have access to the money
created before there are widespread price increases. Artificially low interest
rates also facilitate the growth of the welfare-warfare state.
The Federal Reserve’s
inflationary policies harm the average American by eroding the dollar’s
purchasing power. This forces consumers to rely on credit cards and other forms
of debt to maintain their standard of living. Many Americans are unable to
afford their own homes because they are saddled with student loan debt that can
even exceed their income.
Since
the bailouts of 2008, there has been a growing understanding that the current
system is rigged in favor of the elites and against the average American.
Unfortunately, popular confusion of our system of Keynesian neoliberalism with
a free-market economy, combined with a widespread entitlement mentality, has
led many Americans to support increasing government control of our economy.
The key to beating back the rising
support for socialism on both the left and right is helping more people
understand that big government and central banking are the cause of their
problems and that free markets in all areas — and especially in money — is the
solution. It is important that the liberty movement put pressure on Congress to
cut spending and rein in or, better yet, end the Fed.
Dr. Ron
Paul is a former member of Congress and Distinguished Counselor to the Mises
Institute.
Copyright © 2018 Ron Paul
