BETWEEN THE LINES: Federal Reserve throws another hail Mary

In my economic course on money and banking in college, I learned about the powers and philosophy of the Federal Reserve system that, in theory, was designed to control the extremes of the business cycle. It would cool down the inflationary pressures when needed and lower interest rates to stimulate the economy. It sounded quite plausible.

The Federal Reserve is now approaching its 100th birthday, and the central bank’s record has been less than stellar.  Part of its problem is simply that of human nature. Although patience is a virtue, few possess it. The powers that be often feel the political pressure to do something rather than allow the free market to work through its own problems. In so doing, they typically end up making matters worse as they did during the Great Depression.

Then, on other occasions, by the time they recognize the problems and act, the economy is already beginning to recover, resulting in false credit for their actions. Consequently, my reading and research since those college days in the 1960s has led me to see central banking in a different light.

History seems to be repeating itself as the Fed continues to roll out one program after another with exotic sounding names such as QE1, QE2, QE3 and Operation Twist to get the economy rolling. After the economic downturn from 2007 to 2009, the economy has struggled in the weakest recovery since the 1930s. Unemployment remains high and is expected to continue to remain so through at least 2013.

That prediction is considered optimistic by many.

The Fed’s latest maneuver is a plan to buy back a half-trillion dollars of bad mortgages yearly. The plan might indicate the concern this quasi-government entity has about deflationary pressures that might result from mortgage defaults. Since most banks hold a large percentage of mortgages as collateral against deposit balances, their balance sheets could take a big hit.

There is considerable merit to the old adage, “If at first you don’t succeed, try, try again," but it does have its limitations. What inevitably will happen is the central bank’s actions will make things much worse. It is far too tempting to avoid pain in the short run and hope the economy will eventually turn the corner rather than face the reality that spending beyond one’s means has consequences.

The sea of debt we have accumulated will lead to a tidal wave of destruction. Although blame will be shared by presidents George W. Bush and Barack Obama, the real culprits are members of Congress, both Republicans and Democrats, who have used spending to enhance their re-election prospects by catering to their respective special-interest groups.  Doing what is in America’s best interest has been lost on the altar of self-indulgence.

In football terminology, Ben Bernanke, chairman of the Federal Reserve, is tossing one last hail-Mary pass in the hopes of scoring a winning touchdown. The chairman will learn what most football fans already know — that the usual result of these efforts is a loss.

Laughlin is a Christian Libertarian. He is an economist, teacher, father, husband and most recently a grandfather. He has written a weekly column for The Tribune for 13 years. He and his wife Gina reside in Meadowlakes. To contact him, email ablaughlin@nctv.com. He is an independent columnist, not a staff member, and his views do not necessarily reflect those of The Tribune or its parent company.

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