Monday, April 28, 2008

One of the Reasons You are Paying More for Fuel and Groceries

Inflation is the thief of the thrifty middle class. —WSJ Editors

Saving more, but enjoying it less? Perhaps the Federal Reserve is to blame. To most Americans, the Fed is an enigma. They hear news about the Fed, especially with respect to interest rates. But few Americans have a firm grasp on the Fed’s actual role and how its actions impact their lives.

The Fed is a quasi-public central bank that ultimately answers to no political authority. When the Federal Reserve Act was enacted in 1913, it was understood that the central bank needed autonomy to fulfill its purpose of providing stability in the financial industry.

The Wall Street Journal Editors claim in this editorial that Fed Chairman Ben Bernanke is doing a deplorable job of providing this kind of stability. In fact, they contend that much of today’s inflation is directly attributable to Bernanke’s actions. For example, they suggest that almost half the rise in the price you pay for gas at the pump stems from bad Fed policies.

From the days of the previous Fed Chairman, Alan Greenspan, the Fed’s main inflation fighting tool has been cutting short term interest rates, which eases the money supply. But the WSJ Editors point out that this tactic has decreasing effectiveness. It even becomes destructive when it undermines overall financial confidence. Then it actually causes inflation of the commodities that most impact the budgets of American families.

The WSJ Editors gibe:

“So Federal Reserve officials are whispering to reporters that they will consider a "pause" after another interest-rate cut this week. Perhaps we should be more respectful, but this sounds like the alcoholic who tells his wife he'll quit drinking next weekend, after one more bender. What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy money but membership in Central Bankers Anonymous.”

It’s a lot easier to be a critic than to be the guy that’s actually doing the job and taking the heat. Even the WSJ Editors hail some of Bernanke’s actions and admit that the Fed has gotten lots of pressure from both Wall Street and politicians to continually cut short term interest rates. But, the Editors argue, it should be clear by now that this pursuit has crossed the line and is actually causing financial instability.

The WSJ Editors finally show their exasperation when they say that neither the Bush Administration nor the McCain campaign seem to have the remotest clue about “the monetary roots of our current economic troubles.” Presumably, Republicans are expected to grasp this concept, while Democrats are not.

Several things are clear at this point. We are facing some serious economic problems that seem to be of 1970s vintage. We’ve got a lot of top level players — in both politics and business — that are standing around pointing fingers at each other. And whatever it is that they are doing to address the problems isn’t working.

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