On June 28th 2017, the United States Congress held a hearing titled: “The Federal Reserve’s Impact on Main Street, Retirees and Savings.” If you haven't watched it yet, we highly recommend doing so.
We followed the live feed closely here at PeakProsperity.com (as this topic is a major focus of ours) and were extremely and pleasantly surprised that most of the experts invited to provide testimony expressed views that closely mirror our own. They were critical of much of what the Federal Reserve has done over the past decade, explaining that its policies have badly hurt "regular Americans" while vastly enriching big corporations and the privileged elite.
Joining us for today's podcast is Alex J. Pollock, one of the experts who participated on that Congressional panel. Pollock is a Distinguished Senior Fellow with the R Street Institute, a non-profit, non-partisan public policy think tank based in Washington, D.C.. He also serves as a Director of the CME Group and is the author of Boom & Bust: Financial Cycles and Human Prosperity (AEI Press, 2010).
In this discussion, Pollock details out his assessments of the Fed's major transgressions against the interests of the general public. But perhaps more interestingly, he shares his observations from the hearing and how it struck him that many of the members of Congress that convened it appear to be growing increasingly concerned about the Fed's lack of accountability, as well as its potential fallibility.
I thought the members of the subcommittee were serious and had clearly done some study of the issues. These are just hugely important, as there’s nothing that’s more ubiquitous in any society than money. 100 some years ago, they used to call the nature of money -- about which they had great debates in the days of William Jennings Bryan and William McKinley -- "The Money Question".
The Money Question continues to be huge, because if you’re changing the nature of money and manipulating interest rates and manipulating financial markets, you are touching virtually everybody in this society. That’s the basic activity that’s going on with the Federal Reserve and it’s a deeply and essentially political question, in addition to being a financial and economic question.
In my opinion, the impact of the Fed's policies have been highly negative. They have engineered negative real interest rates, which have a negative impact on savings and especially on conservative savers.
But I want to touch on the 2008 crisis. All right, we had the period of the crisis, and during a crisis there’s extreme uncertainty. So there was experimentation and bailouts going on. We can always argue about what was the right way to do it, but these things happen in nearly every crisis.
But now the crisis is over. And when did the crisis end in the United States? In the second quarter of 2009. That’s eight years ago. So, the question that I like to think about is: Eight years later, why have we still got this Federal Reserve manipulation going on? And in particular: Why are we still taking money away from savers to give to borrowers?
The saver has hard-earned savings prudently laid up to provide for emergencies and for the future. Let’s say the interest rate has been something like, 0.3%, something trivial, thanks to the Fed. Meanwhile, the Fed is trying to engineer annual inflation of 2% and has publicly announced its plan is to have perpetual inflation, forever. So the value of our savings is going down at 1.7 % per year as long as this continues, and it’s been going on eight years after the crisis ended.
On the other side, this is an advantage to various kinds of borrowers. Some of them are ordinary people, but some of them are highly-leveraged speculators. There’s nobody, with one exception, which I’ll mention in a moment, who gets more advantage on a negative interest rates than people with a lot of debt speculating in financial markets. And that makes it much more profitable to carry on their activities.
The one exception is the government itself. That’s an even bigger beneficiary because if the government wants to run big deficits, how can the Fed help it out? By making the real interest rate it has to pay to run its deficits negative. So, one of the things the Fed is doing by this policy, is trying to and succeeding in letting the government run its deficits and keeping the cost of those deficits down on the back of the savers. So, what we have going on here is a huge transfer of wealth from savers to borrowers. And the biggest borrower is, of course, the government itself.
Click the play button below to listen to Chris' interview with Alex J. Pollock (45m:29s).
This is a companion discussion topic for the original entry at https://peakprosperity.com/alex-j-pollock-insights-from-the-recent-congressional-hearing-on-the-fed/
