The Fed and Wall Street: Atristic Stimulation or Necessary Evil?
The Federal Reserve's (the Fed) involvement in the financial market, particularly Wall Street, has long been a subject of debate. Critics argue that such interventions are a form of atristic stimulation – directly or indirectly artificially boosting or supporting certain industries. Advocates point out that such actions are necessary to stabilize the economy in times of crisis.
Artificial Stimulation vs. Free Market Economy
Supporters of a free market economy believe in a hands-off approach to business failures. When a business fails, investors bear the risk and banks will foreclose, or the business may declare bankruptcy. Why should taxpayers bear the risk of bailing out certain businesses, especially in times of crisis? In the context of the last two decades, this question has taken on renewed relevance.
The U.S. Economy’s 2008 Crisis and the Fed's Role
One of the most significant examples of the Fed's intervention was during the 2008 financial crisis. Without the Fed's action to inject liquidity into the markets, the US economy could have faced a catastrophic collapse, or something very close to it. However, this does not mean that the interventions are always beneficial for long-term economic health.
The Fed's actions during the post-great recession years are illustrative. Between 2008 and 2013, the Fed printed and spent over 2.5 trillion dollars, primarily to buy up mortgage-backed securities (MBS) and other "troubled assets." These actions are often referred to as quantitative easing (QE). One of the key impacts of QE was to artificially inflate the price of these assets, intended to stabilize the market and prevent further economic collapse.
Risks of Atristic Stimulation
While these interventions may stabilize the economy in the short term, they often come with significant long-term risks. By providing bailouts, the Fed encourages risky behavior. This, in turn, discourages careful risk management, promoting a culture where big businesses and governments may take risks knowing that they can rely on the Fed for a bailout if necessary.
Moreover, the Fed's interventions can lead to further societal and economic transformations. For example, the transformation of a free capitalist country towards a democratic socialist nation. This is exemplified by the increasing presence of government intervention in the economy and the increasing public support for socialist ideas. This transformation is reflected in the younger generation's expectations of receiving "free stuff" and in the ongoing evolution of business-government relations.
Evaluation of Current Fed Actions
Recent Fed actions, often cited as attempting to boost President Trump's economy, are not primarily aimed at pumping up the market. Instead, the Fed has been selling off assets from its balance sheet since 2018. This process, known as 'unwinding the balance sheet,' has had the opposite effect, flooding the market with more securities and suppressing prices. This contraception aligns more closely with current market conditions and President Trump's economic policies.
In conclusion, while the Fed's interventions can be critical in stabilizing the economy, the long-term risks of such interventions must be carefully considered. As society transforms and institutions evolve, it is essential to question whether the benefits outweigh the costs.
Source: Meeting the 2008 Economic Crisis: Changes for the Federal Reserve