Why shouldn't the market control the flow of money and credit instead of the federal reserve?

Answer 1

The free market SHOULD control interest rates. In Classical Economics, real money means gold and silver. With gold and silver, there is no inflation. The Federal Reserve enables the Congress to pay out more than it takes in.

Rather than just printing paper currency, the Federal government sell Treasury Bonds to the Federal Reserve. These bonds pay interest, which is a large portion of our national debt. The bonds are payed for with Federal Reserve Notes, which the Federal Reserve creates out of NOTHING.

Congress benefits by having more currency to pay its obligations, and the rest of us loose by having the purchasing power of the dollar diminished. That's why counterfeiting is illegal. When government counterfeits, it's called inflation.

By raising interest rates, the Federal Reserve encourages people to invest more of their currency, causing fewer dollars to circulate. Fewer dollars in circulation does not bid up prices. This is an artificial "fix". All it does is to camouflage inflation, temporarily.

We need to abolish the Federal Reserve, and return to a gold backed dollar. Remember, inflation is STEALING.

Answer 2

Bear in mind that the control levied by the Fed on the money and credit markets is limited:
*The Fed is the lender of last resort, but only to banks who are members of the Fed, and this option is rarely used.
* The Fed sets the Fed Funds rate, which ONLY regulates the rate at which financial institutions lend money to each other overnight. Note that other interest-benchmarking instruments (such as T-Bills, Commercial Paper and Mortgage Rates) are set by the markets.
* The Fed makes open market purchases in order to implement policy, which means that the Fed RELIES UPON the markets to function. Thus, the Fed is acting a strong player in these markets, which does not contradict a market mentality.

Effectively, then, the Fed is a big player, but not a controller, of the money and credit markets. Moreover, the stability offered by the presence of the Fed is preferable to an unstable market system where capital flight and excessive fiscal zeal by the federal government can wreak havoc.

Finally, note that there are numerous safety nets outside of the Fed, most importantly the FDIC and numerous private mortgage insurance firms. These have far more impact in lending decisions (because default risk is mitigated in both savings and loans) than does the Fed.

Answer 3

Certainly adapting a Laissez-faire approach is a reasonable position.

And that is what we had before the Federal Reserve.

The main thing the Fed provides regarding money and credit is stability, predictability, and adaptability during economic shocks.

So before the Fed:

- Money was fixed so when demand for money was high, interest rates were high, and vice versa. This manifested itself where interest rates were at their annual high during planting season (when farmers needed capital), and at their annual low following harvest.

The Fed change it so interest rates are relatively stable and the money supply fluctuates per economic demands.

- The fixed money supply also acted like a rubber band on the economy creating boom and bust cycles. One of the Fed's job is to monitor the economy and flatten out the boom/bust cycles.

- The Boom/bust cycles also led to inflation/deflation cycles. A deflation (bust) cycle encourages money holders not to spend or invest because sitting on it earns value. This exasperates the bust even further.

The current Fed goal is modest inflation. This could be considered an invisible tax on idle money, thus encourage people to invest and put their money to work, rather than sit on it.

- Prior to the Fed, the big banks, especially in the east, pretty much controlled interest rates and hence the money supply. The bank panic of 1907 was triggered by the large Knickerbocker Bank running a little short but unable to borrow from other banks, unwilling to help. With the Fed as a banks last resort, this would not occur.

Answer 4

It is an interesting question -- but as we are currently seeing in the housing market, the incentive is to increase the money supply and lower interest rates.

Companies can borrow money easier, etc -------- but this would cause massive inflation.

The action that each agent would take in this scenario is bad for the economy as a whole.......this is why the Fed pisses everyone off when they raise interest rates to slow down a rapidly-growing economy.

Answer 5

indirectly it (the market) does. the fed reacts to the market. the fed acts (should act) as a safety buffer from some powerful country/person from directly effecting our market system.