Tags: Peter D. Schiff

A Plan to Grant the Fed Additional Powers Will Only Exacerbate Current U.S. Woes

By , Money Morning •

By Peter D. Schiff
Guest Columnist

Throughout history, governments have always used crises to justify blatant power grabs.  All too often, the "expanded government powers" that resulted from the moves remain in place - even after the crisis subsides.

This tendency has come into sharp focus here in America recently. Congress signaled that it is preparing to perpetuate the Bush Administration's domestic wiretapping program, and has even abandoned the pretense that warrantless surveillance be confined to terrorism. 

Similarly, even though our financial crisis has yet to reach full flower, U.S. Treasury Secretary Henry M. Paulson has announced plans to give the U.S. Federal Reserve new and explicit powers to oversee and regulate the financial services industry.  However, a sober look at his plan reveals that it is tantamount to giving the fox complete autonomy to guard the henhouse.

What few economic leaders have acknowledged is that the Fed itself is responsible for the real estate and credit bubbles that are the source of our current troubles.  By keeping interest rates too low for too long, the U.S. central bank itself ignited a speculative fever and engendered a disregard for risk management that pushed asset prices above rational levels.  Should we blame the private sector for taking advantage of all the cheap credit, or the Fed for supplying it?  If a kindergarten teacher passes out handfuls of Pixie Stix, and then leaves her classroom unattended for several hours, should we blame the five year olds for the sugar-jag-induced hysteria that ensues? 

The reality is that we should be restricting - rather than expanding - the powers given to the Federal Reserve.  Since former Chairman Alan Greenspan, current Chairman Ben S. Bernanke and the rest have inflicted so much damage with the weapons already in their arsenal, why provide them with still-heavier artillery?  Only in Washington do those who screw up get rewarded for doing so. 

Since the Fed has demonstrated complete incompetence at setting interest rates, why not return that function to the market?  Instead of allowing the Fed to inflict unbridled havoc on our economy, why not re-impose some discipline?  Instead of looking for new ways to regulate Wall Street, why not find an old way to regulate the Fed?  Actually there is a simple answer to all of these questions; it's called the gold standard.

In his speech outlining these proposals, Paulson stated that during the past 50 years, the performance of the U.S. economy has been second to none.  I do not know what planet Paulson has been living on these past 50 years, but it certainly wasn't Earth.  If Paulson had been referring to the prior 50-year period, from 1908-1958, his statement would have been correct.  But from 1958 to 2008, the U.S. economy has blown a lead even greater than the one the Los Angeles Lakers enjoyed over the Boston Celtics in Game Four of the just-concluded NBA Finals.  In fact, it may well qualify as the biggest economic choke in history.

In 1958 the United States enjoyed a standard of living so unmatched that the rest of the world still lived in the Stone Age by comparison.  Our per-capita income was so far ahead of our nearest rival that it seemed impossible that any other nation would ever catch up. 

Today, not only is the per-capita income in the United States barely in the Top 10, but countries that up until a few years ago were barely discernable in our rear-view mirrors are rapidly overtaking us.  When it comes to economic performance during the past 150 years, the United States is the Big Brown of economies.  The period from1858-1908 was the Kentucky Derby, while 1908-1958 was the Preakness Stakes, and 1958-2008 was the Belmont Stakes. The United States dominated the first two, but lost the final round.

Indeed, not only did the United States surrender a substantial lead, but in many respects our current standard of living is lower than the one our grandparents enjoyed.  Sure we have a few more gadgets, larger televisions and more prevalent air conditioning, but the quality of life has actually declined. 

In the 1950s, the average man earned enough money to fully support a wife and four kids, all while saving for retirement and paying off his mortgage.  Today the average man can barely support himself.  It takes two breadwinners in most families to make ends meet, and that is assuming there are only two children.  Even with both parents working, the typical mortgage on the family home will never be paid off and retirement is now a pipedream.  Flush with high pay, low debt, and a strong currency, the Ugly American in the 1950s could vacation in Europe like a king.  Now we can barely afford the gas for a day trip to a Six Flags theme park.

If Paulson can be so completely clueless regarding the Fed's role in the current debacle - and in America's economic stumbles during the past two generations - why should anyone place any faith in his proposed remedies?  In fact, a Federal Reserve that's not elected and that's accountable to no one - and which nonetheless has lately proven to be as politically craven as any two-bit politician - does not hold the keys to our economic revival.  However, with its increased willingness to rescue the big financial firms from their own excesses, perhaps Paulson sees an expanded Fed as the best way to ensure the continued prosperity of his former pals on Wall Street. 

[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a regular contributor to Money Morning, and most recently wrote about the fallacy of the Fed's "strong dollar policy" in his most recent Money Morning column. For a more-detailed analysis of the nation's financial problems, and the inherent dangers that these problems pose for both the U.S. economy and for dollar-denominated investments, click here to download Euro Pacific's new financial-research report, "The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities." The report is free of charge.]

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