RICHMOND, Va. — A display case in the lobby of the Federal Reserve Bank here might express humility. The case holds a 99.9 percent pure gold bar weighing 401.75 troy ounces. Minted in 1952, when the price of gold was $35 an ounce, the bar was worth about $14,000.
By GEORGE WILL
The Washington Post
In 1978, when this bank acquired the bar, the average price of gold was $193.40 an ounce and the bar was worth about $78,000. Today, with gold selling for around $1,600 an ounce, it is worth about $642,800. If the Federal Reserves primary mission is to preserve the currency as a store of value, displaying the gold bar is an almost droll declaration: Mission unaccomplished.
Today the Feds second mission is to maximize employment, and Chairman Ben Bernanke construes the dual mandate as a single capacious assignment promoting a healthy economy. But the Feds hubris ignores the fact that it anticipated neither the 1929 Great Depression nor the Great Recession that began five years ago.
The Fed failed to cure the former, and todays unprecedentedly anemic recovery approximately 3 million fewer people are working than were five years ago has failed to cure the latter. If the workforce participation rate were as high as it was when Barack Obama was first inaugurated, the unemployment rate would be 10.8 percent.
Jeffrey M. Lacker has become the Feds resident dissenter. As a voting member of the Federal Open Market Committee, Lacker, president of the regional bank here, has cast one-third of the dissents recorded during Bernankes seven years as chairman.
When he told The New York Times, Were at the limits of our understanding of how monetary policy affects the economy, he was too polite. We are increasingly understanding the deleterious effects political as well as economic of persistent low interest rates.
While Lacker says a vigorous monetary policy response can be necessary at times to prevent a contraction from becoming a deflationary spiral, the Fed continues its vigorous pursuit of growth through cheap credit more than four years after the moment of crisis. Meanwhile, monetary decisions influence political debates.
Will Rogers said, Be thankful were not getting all the government were paying for. Today we are not paying for all the government we are getting, and the political class benefiting from this practice should be thankful for the Feds low interest rate policy, which makes running deficits inexpensive.
In addition to making big government cheap, this causes a flight of investors from interest-paying assets into equities the rising stock market primarily benefits the wealthy and commodities, rather than job-creating investments.
Fed policy, which has failed so far, can also fail by succeeding. If strong economic growth begins, interest rates will rise and debt-service costs will cause the deficit to explode.
The Feds policy regarding the safety net it weaves beneath large financial institutions deemed too big to fail is called constructive ambiguity. Lacker believes the policy is not constructive, since it is not really ambiguous. Although bailing out too-big-to-fail firms is discretionary, market participants draw inferences for future policy from our past actions.
Ambiguity, he says, breeds expectations that the Fed will act as rescuer, and these expectations are incentives for risk-taking that can compel the Fed to act.
The Fed, born in 1913, is the largest buyer of 30-year Treasury securities. And it, not Congress, which supposedly controls the governments purse strings, funds the $447.7 million Consumer Financial Protection Bureau, headed by a person not lawfully in office. Richard Cordray was installed by Obama by a process that a court says amounts to a spurious recess appointment made to vitiate the Senates power to advise and consent to presidential appointments.
So before blowing out the 100 candles on the Feds birthday cake, consider the perverse result of current Fed policy: Although money is promiscuously printed to keep interest rates low, credit is tight as money flows toward high-return assets. Such as gold.
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