We all know it’s illegal to fix prices. And we all know that various agencies of the government carefully scrutinize big mergers to make sure that the combined company isn’t so big that it can take over the market. 

In fact, the first sentence on the website of the Federal Trade Commission states: The law bars mergers when the effect “may be substantially to lessen competition or to tend to create a monopoly.” 

The free enterprise system encourages competition and prohibits monopoly. Our legal system, going back more than a century to the Sherman Anti-Trust Act of 1890, is designed to prosecute anti-competitive, monopolistic combinations and organizations.

Which leaves just one question: Why does the Federal Reserve have a “monopoly” on managing the nation’s money supply, determining the level of interest rates and using its monopoly powers to manipulate the supply and price of credit and the value of our currency?

Ask that question and you are likely to get a big yawn, a shoulder shrug or an economic dissertation. Who cares? That’s the way it’s been for over 100 years, since the creation of the Federal Reserve in 1913. That institution — the Federal Reserve System — our “central bank” was certainly an improvement over the competing bank currencies of the 19th century, and was designed to prevent the frequent “panics” that marked that era.

(By the way, the Fed is not a “government agency.” It is actually a “private” banking system, which over the years has taken on very public responsibilities. But it is not owned nor controlled by the government — although the president names the Fed chairman and the seven members of the Board of Governors.)

The question now is whether the voting members of the Fed — which include the seven appointed Board members, and five of the presidents of regional Federal Reserve banks — know what they’re doing! They admit to “making it up” as they go, trying to get the right balance of interest rates, economic growth, job creation and low inflation.

But do these dozen men and women have the ability to predict and push a $4 trillion economy in the right direction? 

Credit Where it’s Due

To give them due credit, the Federal Reserve has avoided a total meltdown of not only the United States economy but also the closely intertwined global economy. 

But just because they have great power, the Fed doesn’t always get it right. Economic historian Jim Stack points says in his current newsletter (Investech.com) that the Fed is creating another “Moral Hazard of Historic Proportions.”

Stack, who has been called one of America’s best market technicians, says that even acting in its best judgment, the Fed has created as many problems as it has solved. He directly puts much of the blame for the 2008 financial crisis at the door of the Fed: “If the Fed had not dropped short-term interest rates to 45 year lows and held them low for too long, then much of the speculation and nonsensical mortgages would not have been created.”

And Stack points out that this is not the first time the Fed has first created a crisis, and then had to rush to resolve it. In 1998, Stack first wrote about the “moral hazard” risk created when the Federal Reserve bailed out Long Term Capital Management, a hedge fund that speculated in Treasury interest rates using huge leverage. 

The idea of Moral Hazard is the belief that if the crisis becomes too great, there will be a bailout — so why worry now? And Stack says that’s exactly what’s happening in the stock market today: “The Fed missed the opportunity to end QE early” he notes, and they continue their policy of low interest rates. That drives money into the stock market in search of returns.

And while Stack’s model portfolios remain highly invested, he says the Fed’s actions — or inaction — to raise rates “increases our level of nervousness in this aging bull market.”

Like all monopolies, the Fed has substituted its judgment of what’s “right” for the judgment of the free market. It has set the price of money low to the detriment of some, and to help others. Low rates help the government finance its huge budget deficits. But low rates hurt savers and retirees looking for income to sustain their lifestyle. Instead, they are driven to riskier investments — pushing stock prices higher.

We all have to live with the Fed’s monopolistic decisions. Banks can’t earn money on lending with rates so low. The low rates hardly offset the risks — so lending slows. And that keeps the economy from growing.

We have allowed one major monopoly to control our economy. And we are all paying the price. That’s The Savage Truth..

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, “The New Savage

Number: How Much Money Do You Really Need to Retire?” 

 

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