Tuesday, August 19, 2014

Federal Reserve Policies Cause Booms and Busts

Richard Ebeling emails:
Dear Bob,

I have a new article on the news and commentary website, ‘EpicTimes,” on “Federal Reserve Policies Cause Booms and Busts.”

The media pundits and too many economic policy analysts presume that the role of the Federal Reserve is to control and manipulate the supply of money and rates of interest, including pushing and keeping certain core interest rates at nearly zero, and “negative” when adjusted for the rate of price inflation.

In fact, interest rates are supposed to do what any other price is supposed to do – inform market participants about underlying, real supply and demand conditions, serve as an incentive mechanism for consumers and producers to adjust their actions to those of others in the market, and to bring supply and demand into coordination with each other.

But Federal Reserve policy prevents market rates of interest from doing their job through policy-tool manipulations that push the demands of borrowers out of balance with the supply of savers. As a consequence, investment decisions and the use of capital are thrown out of balance with the available supply of real savings to complete and sustain those capital investments.

This is what caused the boom and bust cycle of 2003-2008, and which is likely setting the stage of a new downturn at some point in the future, because the Federal Reserve’s monetary central planners have been running amok with monetary expansion and interest rate distortions for another six years, now.



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