critiquing the Federal Reserve

Answer

Economics

1. Critiquing of the Federal Reserve

            Since its inception in 1913, the U.S. Federal Reserve has been criticized on several occasions. The first criticism of the Federal Reserve was in 1929 by economist Milton Friedman who criticized the wall street crash that led to the great depression. Milton and Anna argued that the erroneous monetary policies were a lead case of the Great Depression (Stephen, 2017). Following the stock market crash in 1929, the Federal Reserve continued with restrictive measures of money supply and refused to bail out the suffering banks. During this error, economists argued that the restrictive measures were a contributor to the mild recession, which was later catastrophic, causing a global economic meltdown (Stephen, 2017).

On the monetarist view, the Great Depression was highly caused by a limited money supply. Hence, economists questioned the purpose and role of the Federal Reserve if it could not hold proper monetary policies to prevent such economic meltdowns. With the economy's contraction, there was a significant drop in income, price of products, and rates of employment. The money supply restriction forced people to hold more money than the supply from the Federal Reserve. Hoarding money meant reduced consumption and demand for products and services, which caused a contraction in employment and full productivity in the manufacturing sector (Stephen, 2017). Hence, Milton and Schwartz argued that the Federal Reserve's monetary policies were not adequate, and that they restricted the growth of key sectors. The notion has been supported that the poor leadership of the Federal Reserve led to an economic meltdown.

            The Federal Reserve was also criticized as a partial contributor to the global financial crisis experienced between 2007 and 2008. Economists, such as John Taylor, have asserted that the Federal Reserve was a partial contributor to the housing bubble that led to the global financial crisis. Notably, the Fed kept the interest rates low following the 9/11 terrorist attack to allow for economic recovery. The housing bubble was a result of a credit crunch. Although the Fed is responsible for controlling the long-term interest rates, it did not raise the short-term interest rates, leading to a credit concentration as people could afford loans in the short-term but could not afford to pay in the long-run (Stephen, 2017).

Further, the Fed's role as a supervisor and regulator has been criticized by the U.S. legislators as ineffective. The failure to protect consumers through the banks’ over lending policies and sub-prime lending was an abysmal failure that led to the financial crisis. The Fed had a role in protecting borrowers, and providing proper oversight in the banking sector, which could have had streamlined lending and helped avoid the global financial crisis. Other critics of the Federal reserve include the lack of transparency in some of its committees, which are not sufficiently audited (Reuters, 2018). For example, the Federal Open Market Committee, which forms part of the Fed, has been criticized for the lack of transparency.

The majority of Americans view that the system should be held accountable for its actions or be abolished. In the eyes of the public, reports from the committee are seen as biased and favoring the rich and wealthy in society hence the abolishment. In addition, legislators, including Republicans, have accused the Fed of hurting the economy on the dollar's devaluation. They argue that the fiscal and monetary policies advocated by the Fed often lead to economic booms and busts when the latter creates too much or too little fiat currency (Reuters, 2018). However, the Fed's supporters support its independence as their policies are effective in maintaining low inflationary conditions and protecting the economy from undue disadvantages in the international markets.