Draining the Fed

The Chief Economist and Deputy Chief Economist at First Trust coauthored an article in which they point out that although the economy has returned to normal after the Panic of 2008, the one thing that hasn’t done so is the size and overreach of government with an emphasis on the Fed. Indeed, the point they make is that it is time to drain the Fed swamp:

It wasn’t government that saved the economy.  Quantitative Easing was started in September 2008.  TARP was passed on October 3, 2008.  Yet, for the next five months markets continued to implode, the economy plummeted and private money did not flow to private banks.

On March 9, 2009, with the announcement that insanely rigid mark-to-market accounting rules would be changed, the markets stopped falling, the economy turned toward growth and private investors started investing in banks.  All this happened immediately when the accounting rule was changed.  No longer could these crazy rules wipe out bank capital by marking down asset values despite little to no change in cash flows.  Changing this rule was the key to recovery, not QE, TARP or “stress tests.”

The Fed, and supporters of government intervention, ignore all these facts.  They never address them.  Why?  First, institutions protect themselves even if it’s at the expense of the truth.  Second, human nature doesn’t like to admit mistakes.  Third, Washington DC always uses crises to grow.  Admitting that their policies haven’t worked would lead to a smaller government with less power.

The Fed has become massive.  Its balance sheet is nearly 25% of GDP.  Never before has it been this large.  And yet, the economy has grown relatively slowly.  Back in the 1980s and 1990s, with a much smaller Fed balance sheet, the economy grew far more rapidly.

Here’s hoping the Don is as good at making Fed appointments as he is at appointing good judges.

Hat tip: Outside the Box from Mauldin Economics

Posted September 14th, 2017 Filed in Economics and the Economy, Government