The Federal Reserve Bank is no less an institution of central economic planning than the politburo was in the now defunct Soviet Union. The governing board of the Fed is an unelected bureaucracy with accountability to no one that single-handedly controls the lifeblood (e.g. money) of the U.S. economy. Worse, when economic crisis does happen, it always seems the Fed is immune from any blame in the matter. Examples of where Fed policies have caused or at least not prevented crisis include the Great Depression of the 1930s, the high inflation period of the 1970s and the current subprime mortgage crisis and housing bubble of 2007-2008. You would think that with a track record such as the Fed has that both major presidential candidates would be calling for changes in the way our currency is managed. Think again.
The current subprime mortgage crisis and housing bubble are indicative of the fact that Barack Obama and John McCain are either ignorant of its causes or the Fed, J Edgar Hoover style, has a dossier of incriminating material against both men. My guess is that there is a third option and that is that both men dare not rail against the sacred economic oligarchs at the Fed. because that would make them sound like kooks to the rest of the Washington Establishment. After all, how can the Fed ever be at fault since it is our great protector against everything that is wrong with capitalism?
The fact of the matter is that the Fed is the primary culprit for the current subprime crisis and housing bubble. Through artificially low interest rates and expansion of the money supply, the Fed caused many debt-ridden Americans to go deeper into hock by committing to loans they had no chance of repaying. For instance, in 2000, the federal funds rate, the rate set by the Fed that is related to mortgage rates, was at 6.24% (see table below). To head off a recession caused by the dot com bubble (another crisis caused or at least not prevented by the Fed) and 911 attacks, Fed chairman Alan Greenspan took the rate down to 3.88 in 2001 and into the 1% range for the next three years.
These artificially low rates attracted borrowers into the housing market who were one rate adjustment or one pink slip away from foreclosure. That is exactly what has happened to many of them. May marked the 29th straight month where there has been a year over year increase in foreclosures.