Let's Be Frank, Barney: The Federal Reserve Hurts We The People.

By Logan Flatt, CFA

   In his counterpoint to Massachusetts Congressman Barney Frank's partisan diatribe against America's laissez faire approach to economic growth and its “unacceptable levels of income inequality” (Financial Times, “Why America needs a little less laissez-faire”, January 14), Mr. Jeff Erber made two mistakes that weakened his otherwise spot on argument (Financial Times, Letters, “Government regulation is to blame for mortgage market collapse”, January 17).

   First, Mr. Erber states, "it is far more likely that income inequality is wide because of the current phase of the US economy's business cycle." That’s baloney. Economic gobbledygook is not necessary to explain the broad distribution of household incomes in America. The freedoms enshrined in the U.S. Constitution explain it fully. The Founders and the States did not make "income equality" a founding principle of the United States of America. They also did not require that Americans' incomes be evaluated and judged for “fairness” by political elites in Washington, D.C. earning a cost-of-living-adjusted income of $169,300 per year – that’s in the top 3.2% of all U.S. households per the U.S. Census Bureau – just like Harvard-educated Congressman Frank has earned through good economic times and bad as a career politician free from the tyranny of term limits for the past 27 years. Congressman Frank’s vision of a statist America is indefensible vis-à-vis the fundamental law of the land, through which We the People, among other things, secured the Blessings of Liberty to ourselves and our Posterity. Such Blessings of Liberty include as much – or as little – income as we so freely choose to go out into America’s market economy and earn, thank you very much.

   Second, Mr. Erber states, “In order to stave off inflation, the Federal Reserve lowered the fed funds rate…”. Au contraire, mon frère! From 2000 to 2004, the Federal Reserve lowered its target for the federal funds rate repeatedly in hopes of staving off recession, not inflation. The Fed’s deliberate actions in favor of economic growth injected vast amounts of cheap credit into the U.S. economy which only stoked inflation, as evidenced by the upward trend in the annual rate of inflation from 2002 to today. The Federal Reserve’s cheap credit policy further stoked irrational exuberance in the markets for U.S. mortgages and real estate. Flush with money, urbane financial institutions lent foolishly while naïve borrowers speculated Trumpianly only to default on the “leverage” they never should have borrowed in the first place.

   For his part, Congressman Frank correctly notes that mortgage-backed securities spread the pain of default to other parts of the financial world, but he misdiagnoses the true disease that ails the U.S. economy today. America’s economic problems are not due to market forces, laissez faire economic policies, or clever financial engineering. The pathogen that most afflicts the U.S. economy today is the Federal Reserve, which engages unwarrantably in the central planning of U.S. economic growth. By creating artificial growth instead of vigilantly protecting We the People from the ravages of inflation, the Federal Reserve engorges the U.S. money supply with a debased currency backed by nothing more substantive than the “full faith and credit” of a bloated U.S. federal government beholden to foreign lenders to pay its bills. Next week, We the People as well as Congressman Frank will watch the Federal Reserve continue its brazen destruction of the U.S. dollar by expanding cheap credit throughout America’s economy yet again.

   NOTE: In a surprise move in the early morning of January 22 -- only a few short hours after this essay was completed -- the U.S. Federal Reserve cut its target for the fed funds rate by 75 basis points to 3.50%. The Fed continued its debasement of the U.S. Dollar at its regularly scheduled FOMC meeting on January 30 by cutting its target for the fed funds rate by a further 50 basis points to 3.00%.

   UPDATE: In the afternoon of March 18 the U.S. Federal Reserve yet again cut its target for the fed funds rate by 75 basis points to 2.25%.

   UPDATE: On April 30, the U.S. Federal Reserve once again cut its target for the fed funds rate, lowering it 25 basis points to 2.00%.

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