How an Economy Grows and Why It Crashes

by Peter D. Schiff

This system has two massive flaws. First, it assumes that a small group of people at the Fed can make better decisions than millions of people making independent decisions (also known as “the marketplace”) about the proper level of interest rates. But, the Fed has “no skin in the game,” as the saying goes. It does not generate the savings and will not suffer if loans go bad. The people saved the money and the bank’s profits depend on its wise stewardship. Without this connection, lending is inherently inefficient. Second, the Fed’s decisions are always determined by political, rather than economic, considerations. As low rates tend to make the economy appear better on the surface, push down the cost of servicing mortgages and other loans, and help financial firms make money, there are a great many people who want lower rates. Presidents seeking reelection will always bang the drum for lower rates, and they will pressure the Fed to help out. On their part, Fed policy makers naturally want to be seen as the good guys who help the economy, not the tightfisted Scrooges who push it into recession. The members of society who would favor high rates, most notably the savers, have no well-organized interest group. Their voices are never heard. As a result, there is a consistent bias toward holding rates too low, rather than too high. Remember, low rates encourage borrowing and discourage saving. Not surprisingly, the United States has been transformed from a nation of savers ...