Niels Erich doubts my characterization of the Federal Reserve as capable of disastrous mistakes, adding “not that it has necessarily made any.” In fact, it has made a lot of them. We need to recall a little financial history, which possibly Mr. Erich has insufficiently studied.

Considering only the last half century, the Fed created the Credit Crunch of 1966, the Credit Crunch of 1969 and then the massively destructive Great Inflation of the 1970s, which led directly to the financial crises of the 1980s. Based on the 1990s, which included the dot-com bubble, in the 2000s, the Fed announced with pride that it was presiding over the Great Moderation, which turned out to be the Great Leveraging.

After the collapse of the dot-com market, the Fed decided it needed to promote a “wealth effect” by promoting a housing boom. It got the boom, which turned into the Great Housing Bubble. The Fed utterly failed to understand the dangers of this bubble, failed to forecast the crisis and failed to forecast the ensuing deep recession. It did then indeed carry out the lender of last resort function assigned to it since 1913, but has gone far past this to pursue more wealth effects by imposing negative real interest rates for the eight years since the crisis ended, thus expropriating savings and inducing new asset price inflations in houses and securities. Nobody knows where these will end, including the Fed.

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