If You Support Free Markets, You Must Call Central Banking Into Question

Published in Business and Economy .

Former Congressman Ron Paul recently brought up some interesting points about the Federal Reserve in an article for his institute. 

The coronavirus has the entire world in a panic, with U.S. policymakers fumbling for a solution to put a handle on it. This panic has spilled onto Wall Street, with the stock market taking a beating. Unsurprisingly, the Federal Reserve responded to the panic by announcing an “emergency” interest rate cut. After the stock market sputtered along, there is now speculation that the Fed plans on cutting interest rates again throughout the year. 

Given that interest rates are already low, additional rate cuts would bring interest rates close to zero and possibly have them go into the negative. The reduction of the interest rate creates perverse incentives throughout the economy. In effect, it encourages consumers and businesses to spend all the money they make. Indeed, this could provide a “stimulus” in the short term. However, we must always look at the long term when analyzing public policy. These loose money measures hinder economic growth by diminishing the savings needed for investments in crucial economic activities that keep people’s livelihoods intact.

As a result of the loose money moves the Fed is taking, there will be more pressure on the Fed to maintain lower interest rates. Further, there will be new demands on Congress and the president to create a new round of government spending. However, this is only the tip of the iceberg. 

Boston Federal Reserve President Eric Rosengren has hinted that Congress let the Federal Reserve add assets of private companies to the Fed’s balance sheet, which is already quite big. Ron Paul is correct in noting that “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.” By handing this power to the Fed, the Fed can now pick winners and losers for its investment. Paul points out that the Fed can now favor investing “in ‘green energy’ companies over other companies or refusing to purchase assets of retailers who sell firearms or tobacco products.”

This proposal to “invest” in private companies is clearly top-down and should disabuse people of the notion that the Federal Reserve is apolitical. The Federal Reserve’s manipulation of interest rates is a textbook example of central planning. Like other forms of central planning, central banks’ blind attempts to set interest rates cause distortions throughout the market economy. The infamous boom and bust cycle comes to mind as productive capital is wasted during the phony boom period. 

At the fundamental level, civilization is at stake when talking about monetary policy. Forget the fancy graphs that you saw countless times during your college economics classes. Monetary policy goes well beyond that. Jeff Deist, the president of the Mises Institute, recognized this in an article condemning negative interest rates: 

“Negative interest rates are the price we pay for central banks. The destruction of capital, economic and otherwise, is contrary to every human impulse. Civilization requires accumulation and production; de-civilization happens when too many people in a society borrow, spend, and consume more than they produce. No society in human history previously entertained the idea of negative interest rates, so like central bankers, we are all in uncharted territory now.”

It’s important to point out that managerial policies enjoy considerable support from across the political spectrum. That’s why it’s incumbent upon us to highlight how free-market principles also apply to monetary policy. It would behoove free-market advocates to take a multi-pronged approach to economic issues, where they must encourage Congress to cut spending and put the clamps on the Fed’s policies. In an ideal scenario, the Fed would be abolished. Alas, we live in an era where the managerial state is so consolidated that it will take a gradualist approach to roll back monetary malfeasance. We have to start somewhere, though. Raising awareness is the first step, which should then be consolidated into legislative action. 

No one said the road to monetary reform would be easy.

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