There are all sorts of crazy myths surrounding central banks. Which is strange because once you understand the operational realities of the monetary system you realize that Central Banks are actually pretty boring entities who mostly serve as bank clearinghouses with far less control over the economy than some think. But that doesn’t stop people from constantly blaming the Fed for all of our problems or expecting them to be able to solve every policy problem.
This has become even more pervasive in the last seven years as Congress has become gridlocked and QE after QE has been unfurled. And this has coincided with an extraordinary list of bad excuses and bad predictions about the impact of Fed policy. Here’s a short list:
- Myth: The bull market has been a fake manipulation due to QE.
- Reality: The bull market has coincided with record corporate profits which the Fed obviously doesn’t control.
- Myth: The housing bubble was caused by the Fed’s low interest rate policy.
- Reality: The housing bubble was caused by irrational speculation of which interest rates were just one of the influencing components.
- Myth: QE would cause a spiraling inflation that would wreck the economy.
- Reality: It was always wrong to call QE “money printing”.
- Myth: That hyperinflation didn’t come because the Fed paid banks to hold onto their reserves by paying interest on reserves.
- Reality: banks don’t lend reserves to non-banks so paying interest on reserves wouldn’t stop banks from lending them out in the first place).
I’m by no means an apologist for the Fed. I’ve been highly critical of policies like QE over the years. But if we’re going to make better predictions and policy conclusions about our economy then we need a better understanding of the monetary world. Unfortunately, using the Fed as a constant scapegoat or expecting too much from it skirts the accountability and scrutiny necessary for us to realize what the Fed really is and how much influence they exert. Bad excuses and lazy analysis make for easy conclusions. But they also make for bad understandings which lay the groundwork for bad future policy ideas.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.