The Federal Reserve: Aging Magician of the Welfare State

December 22, 2010 06:17

We hear of no “Plan B” to address the contradiction in terms that we may actually face: a welfare state bereft of an effective central bank.

By Mikiel de Bary at American Thinker


Almost two years ago, still in the early months of the financial crisis, money supply growth started to falter, frustrating Federal Reserve Board policy. Soon this turned into tenacious rates of decrease. This little discussed development could profoundly affect the course of our history.

Not to put too fine a point on it, unrelenting money supply expansion was from the start a financial drug, which came to be administered in steadily increasing doses. Not just in recent years, but over several decades, the provider of the drug, the Fed, has effectively cooked the nation’s books and, crucially to our theme, contributed mightily to tax collections while substantially easing the strain of financing government debt increases at all levels.

Can the Fed engineer a recovery in broad money supply growth? Possibly, but it has not yet, despite trying now for about two years. To expand the money supply in the traditional way, the Fed needs a general optimism, a broad-based confidence, to take hold.

Paradoxically, the very possibility of the Fed’s somehow regaining its money-producing powers should be a source of unease rather than hope, for a resurgent Fed would imply resumption in the growth of the welfare state, which is to say an intensification of governmental burdens on the private sector.

It was “no accident” that the golden age of Fed money production — 1960, say, to “peak money” in 2009 — was an era that encompassed the long build-up of welfare state entitlement programs. Unless the Fed soon recaptures its money boosting dexterity, its days as the great financial wizard of our welfare state may be over. Without a Fed able to create the appearance of more economic success than is actually occurring, more Americans will question government largesse at their expense.

No serious proposals for dismantling the most fiscally threatening welfare state entitlements have been so much as hinted at. All proposals aim at salvaging them.


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