The Federal Reserve is a colossal failure.

The solution: Abolish the Fed and the FDIC to prevent inflation, the boom/bust cycle and banking crises

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Albert Einstein famously, said, “The definition of insanity is doing the same thing over and over again and expecting a different result.” 

In a Wall Street Journal op-ed today, “Mistakes the Fed Keeps Making,” Mickey D. Levy correctly identifies the mess the Fed has created with its virtually zero interest policy igniting the unsustainable boom of the past several years.  However, he opines that the Fed needs better information to “improve [its] conduct of monetary policy and avoid crises.”  Nonsense.  The Fed employs more than 400 PhD economists, and they still get it all wrong about the effects of easy money.  Talk about intellectual bankruptcy!

The Fed under numerous chairmen who have been nominated by presidents from both major parties have given us two depressions, the “Forgotten Depression” after WW I and the decades long Great Depression of the 1930s. The Federal Reserve was created (1913) to “smooth out” the business cycle.  Not a chance.  Since the end of WW II, recessions (shaded gray areas) have occurred frequently during the 1950s, usually in years ending in zero.  The Great Recession of 2007-09 was a classic Fed induced boom followed by a deep bust.  The short-lived economic downturn in 2020 was not a typical business cycle recession but the result of Covid lockdowns, which caused unemployment to spike and GDP to decline precipitously. 

The current implosion of Silicon Valley Bank and Signature Bank could have been avoided if the Fed did not keep interest rates low for so long.  The Fed’s easy money policies flooded Silicon Valley with enormous liquidity which found its way to the venture capital world for scores of startups.  The startups then deposited their funds into SVB to pay their bills.  Incredibly, some companies kept millions and tens of millions of dollars on deposit, well above the $250,000 maximum insured amount.  But all the depositors will be made whole.  Clearly, the Fed and other government polices create moral hazard, such as people building houses near high-risk areas, e.g., the Jersey shore, Florida shores, California beaches, and other states with shorelines prone to devastating storms.

The solutions are to make the dollar as good as gold again, abolish the Fed so it cannot manipulate rates and create money out of thin air, have the banks back its demand deposits (checking accounts) with 100% reserves, and convert all savings accounts to time deposits, from one day to 30 or more years.  Thus, there would be no need to “insure” deposits because all demand deposits would be “covered” and the question remains who would take on the risk of time deposits.  Depositors or shareholders or a combination of the two. 

This would create a free-market banking and monetary system, which would end the boom/bust cycle, price inflation and banking crises. 

The US economy would boom, crony capitalism would be markedly reduced, the federal government’s budget would have to be reduced because there would be no Fed to buy US Treasury securities if deficit spending would continue. 

In short, separate government from the economy. Laissez faire is good for the economy just as a good diet and exercise are vital to good health.

Murray Sabrin, PhD, is emeritus professor of finance, Ramapo College of New Jersey. Dr. Sabrin is considered a “public intellectual” for writing about the economy in scholarly and popular publications. His new book, The Finance of Health Care: Wellness and Innovative Approaches to Employee Medical Insurance (Business Expert Press, Oct. 24, 2022), and his other BEP publication, Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide (October 2021), provides decision makers with tools needed to help manage their businesses during the business cycle.  Sabrin's autobiography, From Immigrant to Public Intellectual: An American Story, was published in November, 2022.