ig Orange County companies such as New Century Financial Corp., Ameriquest Mortgage Co. and Option One Mortgage Corp. have fallen on tough times.
While many harsh words have been bandied about blaming them for much of the financial panic that we’ve seen in recent weeks, few critics look below the surface to find the true culprit: the Federal Reserve Board of Governors.
It is not New Century that lowered the target interest rate from 6.5% to 1.75%, i.e., almost five whole percentage points, in the space of one year from Jan. 1, 2001, to Jan. 1, 2002. Nor did Ameriquest come up with the idea of lowering that rate to 1% by July 2003. And it was the Fed that didn’t start retracting credit until July 1, 2004, and only slowly lifting rates back up to 5.25% as of July 2006.
The Federal Reserve is useful in times of panic as a kind of overseeing clearinghouse, i.e., to safeguard the day-to-day machinery of banking operations and issue temporary emergency credit to avoid useless trauma to the system. However, beyond that, the Fed is helpless,indeed harmful,when, in addressing its government-appointed mission, it attempts to influence the business cycle, employment, prices and the general economy.
Why are the Fed’s attempts so futile? There are several well-known but forgotten reasons:
– Their methodology is in direct conflict with their mission.
They act upon statistics, and statistics by nature are a molasses-in-winter, after-the-fact phenomenon, whereas their idea of management of the economy requires pre-emptive measures.
– Their powers of intervention are in direct conflict with the mission of all market players.
As Friedrich A. Hayek wrote in “The Road to Serfdom,” “If the individuals are to be able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect their plans.”
This implies that any arbitrary or unpredictable actions on the part of the Fed throw a wrench into the plans of those whose goal is to succeed within the “invisible hand” marketplace.
If everyone has one eye on the profit line and the other on the Fed, obviously they are focusing only half of their attention where it should be. They must include in their plans sufficient reserves to cover the unpredictability of the Fed’s actions. Surely this is an expensive and unnecessary handicap.
– The Fed’s interference in the marketplace has created a whole new profession: That of outguessing the Fed.
Departments of every bank and financial institution in the world,and even some whole companies,are devoted to analyzing global markets as they gyrate around central bank intervention.
– Fed interference creates imbalances in business cycles that encourage otherwise useful market players to become reckless and spendthrift.
Hedge funds, credit derivatives, mortgage companies and those bank departments that trade in them, in spite of their potential usefulness, have created the problems we are experiencing today; but they based it on the latest ballooning of credit made available by the world’s central bankers since 2001.
– Fed interference creates moral hazard.
It is reliance upon the Fed’s capacity to bail out financial crises,powers well over and above their supervisory duties,that encourages risk-takers to assume too much risk at the expense of the taxpayers.
– Central-bank-created fiat money, by definition, has no anchor.
Banks and central banks have lost the magnetic north that was the standardization of the monetary units of the world. It is no wonder indeed that we are now facing the collapse of the Ponzi scheme, just as have all those civilizations in the past that have succumbed to the temptation to debase their currency to bail out debtors.
Why has everyone forgotten these self-evident and self-destructive characteristics of centralized monetary control? How short-sighted humanity is.
Delay is a freelance writer who lives in Marina del Rey.
