Federal Reserve Flunks Basic Economics

Thursday, 23 Jun 2011 09:30 AM

By Jackie Gingrich Cushman

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Dr. Carl J. Arnold taught the money and banking class at Presbyterian College when I was a student there. I can still picture him in 1986: dark, crew-cut hair; pressed khaki pants; white, short-sleeved, buttoned-down shirt; dark, plastic-framed glasses; and a pocket protector. Ok, maybe he didn't wear a pocket protector. In any event, he should have worn one if he didn't.

Dr. Arnold was known for being tough. Before taking his class, I had thought that multiple-choice questions were easy — rule out the ones that were wrong, and you were left with the correct answer. But Dr. Arnold raised multiple-choice questions to a fine art form.

His answers were long and convoluted, filled with multiple qualifications and possibilities. The answer E seemed to always be "A but not B unless it is Wednesday and it rains, then it's A, B and sometimes C but never D, unless it's cloudy with a chance of rain."

I would read the question and potential answers again and again to make sure that I understood the premise. It was challenging, but I loved it. Dr. Arnold was a great teacher. Hard, but good.

Economics and money and banking were particularly interesting to me because they represented the overlap between money and people. What would drive people and business to act (microeconomics); what would economies do under different circumstances (macroeconomics); what could the Federal Reserve do; and how would it affect the economy, businesses and people (money and banking)?

Memorizing the theories and providing answers on tests was easy. You started at point A and traced the impact from point to point until you came to the company, person or part of the economy in question. It made logical sense to me.

The problem becomes more difficult when you move from theory to reality.

Basic theory assumes that one item moves at a time, and the impact cascades like a waterfall. Real life is much messier. A million things are happening at one time, and its not just policy, but what people say about the policy, write about the policy, and believe about the policy that affect what people do in reaction to the policy.

Life's complicated. We've heard that before.

Let's shed a little bit of light on the Federal Reserve. After all, in a bad economy, it's all about the money.

The Federal Reserve is one of the least-understood entities in our government. A seven-member Board of Governors controls it. They are presidential appointees, confirmed by the Senate, each serving 14 years with staggered, even-year starts.

According to the Federal Reserve's "Purposes and Functions" publication, the Fed's duties include:
  • "conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate, long-term interest rates
  • "supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
  • "maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
  • "providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.
Wow, that's a lot.

The Fed also makes sure that the United States has enough money for the approved budget. In the case of deficit spending (spending more than we take in during a given year, which is what we are doing), the Fed borrows the money from investors on behalf of our government. It can then buy back the securities with money that it prints (don't you wish you could do this).

"Thirty percent of government deficits for 2008, 2009, and 2010 were financed by the expansion of the monetary base of the country's money supply (currency, coin and bank reserves)," wrote Robert Auerbach, professor of public affairs at the University of Texas at Austin, in his June 21 column for The Huffington Post titled, "Does the Stimulus Stimulate?"

Remember, the Fed is independent, subject only to oversight by Congress, which is the group that approves the deficit spending.

Makes you worry a bit.

Makes me wish Dr. Arnold would go to Washington and explain to those currently in charge how the money and banking system work, and administer a few tests with those tough multiple-choice questions.






© Creators Syndicate Inc.

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