Federal Reserve System (Also Known Essay

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Their basis of criticism is that it had very expansionary monetary policy in the early days that gave room for misallocation of various capital resources. This lead to various undesirable economic scenarios such as the support of a massive stock price bubble. It has been argued that even though the Federal reserve did not cause the Great depression, it mitigated it through the unnecessary contraction of the money supply which was not necessary at that time since the markets by that time needed to be liquidated (Friedman, 1985).He argued that the Fed should be overhaulead and then replaced by a specialized computer system whose role would be to set rates that are derived from the standards econometrics. However, the Australian School economists have argued that the Fed's manipulation of the supply of money in order to put a halt on "gold flight" away from England lead to serious financial malinvestment which resulted to the Great Depression.

Opacity

The fact that the Federal Reserve is covered and operates in secrecy is a great cause of criticism. This is because of the difficulty in accessing their meetings which are held behind closed doors and whose transcripts are released with a time delay of five years. This makes it very impossible for even the expert policy analysts to air their opinions and thought on the Fed's policies and decisions. The lack of clear communication between the Fed and media is also criticized as being full of jargons while being opaque at the same time. Critics argue that their opacity results to greater volatility in the market and therefore as the market speculates; it remains to have very little information about the possible policy changes in the future.

Employment Critics of the federal Reserve such as Temin (1976), have a conviction that the monetary policy set by the Feds is too tight.

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Their argument is that the lower interest rates is a demerit to the U.S. economy since it culminates to unemployment because of an increased demand for goods. In line with his argument, the possible fall that accompanies inflation should therefore be positive. It is well-known fact that inflation leads to a general decrease in the real value of both domestic and foreign debt. This is also true for the decrease in real interest rates for commodities borrowed at fixed nominal rate.

Global Financial Crisis

Economists such as John Taylor (2007) believe that the Federal reserve was responsible fully or partially for the United States Housing Bubble. These economists believe that Fed kept lowered the interest rates after the 2001 recession. As a consequence, borrowers became reckless. This lead to a housing bubble which then lead to the credit crunch. This interpretation was however disputed by the then-chairman Alan Greenspan. He pointed out that the Federal Reserve's control over the interest rates in the long-term is indirect. He argued that only short-term interest rates were increased not the long-term ones.

My Opinion

I do believe that the reasons for criticizing the Fed are mainly true and well intended. However, it must be realized that the role played by the Federal Reserve of not only regulating the national monetary movements and behavior but that of the global market is crucial for the financial stability of the world. A perfect example is recent bailouts of companies and financial system that has now led to less turbulent financial scenarios worldwide. This of course has its share of criticisms!.....

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