Treece: The Federal Reserve System, Part 3Written by Ben Treece | | firstname.lastname@example.org
We continue this week with our series about the history of the U.S. Federal Reserve System.
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Between 1971 and 1981, the value of the U.S. dollar was cut in half; meanwhile the cost of living doubled. In an effort to combat inflation, President Jimmy Carter appointed Paul Volcker to chairman of the Federal Reserve.
While some viewed Volcker’s policies as extreme, his policies of rapid rate increases have been credited with inflation dropping from more than 10 percent to the low single digits. Volcker was hailed by many as an economic savior, and many hoped that the economy would thrive under his successor, Alan Greenspan, just as it had under him.
Greenspan’s initial policies deified him in the financial world as stocks began to rise along with housing prices; however he was setting the stage for a catastrophe. Greenspan never supported regulation of derivatives and never supported the Glass-Steagall Act, philosophies that can absolutely be attributed to the financial catastrophes of both 1998 and 2008.
Following the Greenspan Era, Ben Bernanke took the reins of the Federal Reserve and many investors and economists had their concerns. Bernanke was viewed as an academic more than an economist, and unfortunately academic models are not applicable in a real-world economy.
As the derivatives and credit bubbles grew, stemming from the Greenspan policies, Bernanke assured the media and the public that the Federal Reserve could contain the crisis, but he was wrong. To this day, many Federal Reserve officials believe their management of the 2008 crisis was a success, as they were able to “bring us back from the brink.” We feel that the Fed could have and probably should have gone a different route.
Rather than put taxpayers on the hook for the bailouts of 2008 and 2009, we believe that the Federal Reserve should have allowed capitalism to work with minor intervention. For example, AIG received a bailout, which tax payers footed the bill for. Why not force equity and debt stakeholders to cover the bad bets? Investors purchase shares of stock and corporate bonds for just that reason: To provide working capital to a business while simultaneously having some skin in the game, whether it is by obtaining partial ownership of a company or having a call on assets. That is not the philosophy that our modern Federal Reserve pursues.
A final thought before we conclude this series. In the early 1920s there was another financial crisis that many historians tend to overlook, which is easy to do as it lasted less than 18 months. The Federal Reserve had very little involvement in that recovery, and allowed the market and economy to independently run its course. We are in an unprecedented era of market manipulation and involvement in private industry on the part of the Federal Reserve. The Fed’s initial purpose was to provide liquidity to the banking system; we believe it is fair to say that they do not operate under that same premise anymore.
Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.