Will the Fed 'Disappear' in the Next Decade?

The Federal Reserve has been busy slashing fund rates for almost a year now, in hope of preventing further damage to banks and financial institutions. Since last summer, the Fed has reduced more than three percentage points off its target short-term lending rate, from 5.25% to the current 2%. This 'quick-fix' approach has been quite lackluster as the market continues to reach lower lows.

The problem is that this time around, the American economy is in a severe state and no government intervention is going to act like a “magic bullet”. Some economists are beginning to think that the economy may have been better off in the long-run if the Fed had not taken the steep cuts beginning last fall at all.

courtesy of the WSJ

I understand the actions that the Fed took last fall likely prevented a complete blowup in the capital markets. But perhaps they were too hasty in the cuts. One of the major problems with taking steep cuts is that current interest rates are already extremely low compared to historical rates. The following is a chart showing the effective fund rate over the past 50 years.

click to enlarge

If rates are so low already, excessive cutting is essentially adding fuel to a growing fire:

1. Increased inflation in a period of neutral economic growth has resulted in stagflation.

2. Devaluation of the USD is beginning to have a real impact not just on the US, but the entire global economy.

3. Bad debt is the single biggest factor in the current meltdown. The idea shouldn’t be to increase loans, but rather taking the time to de-leverage and pay the debts off.

The Fed needs to realize that the financial system contains underlying fundamental issues that will take time to heal. This cannot be a one-time fix (and it never has). Perhaps, the Fed should take some lessons from the central bankers in Europe and China who are taking an active approach to stabilizing inflation and containing their respective currencies.

Although I hope the Fed will increase rates from now on, what I really think they will do is to take another 25 to 50 basis point cut toward the end of this year. This could potentially accelerate the possibility of a sooner removal of the USD as the world’s primary reserve currency. Does this then also raise the possibility, as Jimmy Rogers recently said, that “you can expect the Fed to disappear in the next decade”?

Comments

[wes mantooth:]

We can only hope the Fed would disappear. This whole scenario playing out is just a power grab for them. Makes one think maybe it was intentional.

2008 Jul 16 07:02 AM

[msoori:]

All that the Fed has ever done, and will ever do is screw tax payers by bailing out bad bets by banks. I would hope that the Fed would disappear sooner than later.

2008 Jul 16 08:11 AM

[Guesswhotoo6:]

The FED disappear? Only We the people can ever make the FED go away. More likely the FED will morph into an international corporation like IMF, not actually removed but solidifying even more control over the USA and other nations.

All the problems involving the FED, a private corporation, are centered around the fact that their fiat currency model is terminally flawed. They are simply playing a shell game until it will become obvious that the currency can not continue. This point is where the interest only on the national debts consume the GDP. At this point, or near this point, it's game over. The fiat currency model mathematically fails, leaving the "bankers" with all assets in the end, thus there is no downside for the financial brokers. For a simple proof of this see: perfecteconomy (dot) com . Thanks for your article.

2008 Jul 16 08:41 AM

[Eric Fox:]

The Fed was created by an act of Congress, and it can be eliminated by an act of Congress. There is nothing in the constitution about having a central bank. Would that solve anything? The Treasury might, by default, assume many of its powers.

2008 Jul 16 08:51 AM

[Larry House:]

No, the Fed won't disappear, but the stock market will.

2008 Jul 16 09:36 AM

[broken citizen:]

this is the first generation in the USA that is seeing that the "US Federal Reserve" is a privately owned banking cartel that makes money from issuing currency. The "US Federal Reserve" funds the US Government by floating debt money and this is the source of the "national debt" which incures interest, like a "national credit card." The "US Federal Reserve" and the "IRS" were formed about the same time. Today, the IRS is the collection arm of the "FED" and collects interest payments to pay to the "FED." This is where US workers' tax payments go, to pay the interest to the "FED." This system accomplishes two objectives: it keeps workers broke and broken, and it gives the "FED" (privately owned by bankers) inordinate power over the federal government. The entire system is constructed. It is communism is what it is. US citizens now have zero power over their lives, can seemingly do nothing to protect themselves from this coercion. The IRS is known to be an unregulated capricious if not malicious agency. It makes sense. Their sole mission is to collect interest for the bank. In some countries, citizen receive services for the tax they pay. This is not possible in the USA. Besides the FED literally generating the currency and collecting interest on the very currency existing, citizens simply pay income tax on their labor into the "US Federal Reserve/IRS" collective and do not receive services in return. There is no exchange of value. In a very real sense, the issuing of a Social Security number is the payment invoice number to pay required taxes on labor. Indenture. Modern day slavery. Well accomplished and thoroughly achieved. Perhaps this is the aim of "globalization" to force every person to pay the tax to the bankers who masquerade as government.

2008 Jul 16 10:49 AM

[morgan77:]

The dollar began a little rally today... But we'll need the continued downtrend to convince people it's time to axe the fed.
www.greenfaucet.com/ec...

2008 Jul 16 12:35 PM

[gordon:]

You'd better take a look at the Fed Family Tree before you think this global elite list is EVER going to relinquish power!
land.netonecom.net/tlp...

2008 Jul 16 02:02 PM

[Dan Walker:]

xmplary: The FED's largest single stockholder is JP Morgan. The FED's stated mission is to look out for the banks' interests. Surely you do not expect FED policies to change as long as they exist?

Eric Fox: You really think our current lame-ass excuse for a congress can understand any of this, let alone do something about it? Guesswhotoo6 was a lot closer; we the people will have to do it. And the only way we will is to stop electing liberals, liars and fools (as if there is much difference). Things may get bad enough next year for that to actually happen.

2008 Jul 17 04:41 AM