The Dow Jones Industrial Average hit an all-time high last week, with a record of 14,296.24. Unfortunately, this meteoric rise is backed mainly by the Federal Reserve’s open market activities; not by any real measure of increased market production. With the Fed’s unrelenting race to inject credit into the market over the past few years, shouldn't we pump the brakes for a second and look at what is happening before another bubble is created?
Let’s take a closer look at the foundation underneath this impressive peak of the stock market. Since, the bull market began in March of 2009, has unemployment significantly decreased? No. Has disposable income increased? Hmmm … no. Has productivity surged? Again, no. So what is backing this climb?
Since 2008, the Fed has dedicated its open market activities to keeping interests rates near zero in order to encourage investment. This pushes people out of normal low-risk, activities like saving money or investing in bonds, and in so doing, forces them to invest in riskier assets like stocks and hard commodities. This, in large part, is why we are seeing these record-setting numbers.
Now, the Fed’s main objective in all of this is to increase employment. But in the four years it’s been doing this, has unemployment gotten back to normal levels? In a word, no. And with an almost record high Fed balance sheet of $3.09 trillion, even the most interventionist policy makers can’t say that we haven’t done enough.
Ultimately, the Fed is leading the economy down a path of financial instability. If the Fed keeps up its bond-buying program at the current pace, it will just continue sowing market uncertainty by overloading investor portfolios with risky assets while making it harder to plan for long term investments.
Fortunately, there is a voice of dissent within the Fed. Some officials want to taper the Fed’s monthly bond purchases, set at $85 billion for March, claiming that the Fed is contributing to the problem. Philadelphia Federal Reserve Bank President Charles Plosser recently said that, “We do not want monetary policy to sow the seeds of financial instability … The intention of accommodative monetary policy is to ease credit conditions so that risk-taking and investment increase.”
He warns that “there can be too much of a good thing with interest rates as low for as long as they have been.”
This is good start for a Fed official. But the real question is, can Fed policy actually stabilize markets?
What most monetary theorists refuse to acknowledge is that the Fed’s discretionary power and actions themselves have proven historically to be a major cause of instability in the American economy. Fine-tuning is impossible for the Fed and the inherent uncertainty of future interest rates with an active central bank inhibits long-term investment.
Fundamentally, no group of people, no matter how smart they are, can expect to effectively control the supply of money to affect changes in unemployment and output. This modern notion is ultimately naive and dangerous. However, if we look deeper, what we find is that a free-functioning, market-driven system might be our ticket out.
Free banking offers this solution and should be taken seriously, especially in light of the failure of our central bank to live up to its charter. With competition among privately issued currency, we can reap the benefits of lively, open, and free market, instead of the monopoly system most governments currently impose on its people.
Is this really such an impossible idea? I think not. Private banks previously issued currency in the United States and Canada that was redeemable for gold or silver, and with modern technology, our choices can be even broader. For instance, the digital currency Bitcoin represents a new possibility in the private issue of specie. The only impediment to such innovation and, ultimately, long-term market stability is governmental hubris and a distaste for decentralized decision making.