Words: 470
What are the pros and cons of the Federal Reserve? Make sure you discuss this from a public choice, knowledge problem and macroeconomic perspective. Should the fed remain independent or should it be subject to congressional (executive authority)? Alternatively, should it be abolished? If so what would a fed-less world look like? A. The benefits of the Federal Reserve are that it creates a notion of stability in the financial industry. The Federal Reserve was created to lessen the frequency of bank panics and to be a lender of last resort.
Additionally, the Federal Reserve has taken a stance to improve macroeconomic performance in the United States by promoting full employment and production. Therefore, it staffs hundreds of researchers many of which are economist that study economic indicators. The data collected provided the Fed with an idea where the economy is heading and what action might be needed to stabilize the economy. The Federal Reserve was also created with many check and balances to diffuse centralized power, along with a form of independence to prevent political influence in its decision making. B.
Unfortunately, the advantages of the fed are also what can be argued as its disadvantages. Firstly, many view the economy as naturally stable which will have times of expansion and contraction, and any of the feds attempts to fine tune the economy only promote economic inefficiency. Although the fed staffs many qualified individuals to study economic variables, the problem of not having all the current information still exists; therefore not only could incorrect decision be made but also the outside lag of the implementation of those decisions could further skew the economic data.
Additionally, the feds macroeconomic policies only further distort simple economic signals such as the price mechanism. By raising or lowering the interest rates and increasing or decreasing the money supply the fed begins to send the incorrect information into the market. Artificial prices or interest rates confuse those who rely on these indicators to make economic decisions and can lead to additional instability in the economy. Although the fed was created to be an independent entity separate from political influence, it is still subject to the influence of special interest.
Firstly, the fed has shown patterns of increasing its power by lobbying to gain control over more banks, and as more banks become subject to increasing regulation the more distortions that could be created in the banking industry. Moreover, to maintain its independence and remain free of political pressure, the fed is can sometimes be slow to implement some changes in order to avoid conflict with the president or congress. Changes such as raising interest rates or contracting the money supply both which can cause the economy to slow down.