Fed Reserve: The Common Man’s Flogging Horse

  • SumoMe

The recession? Blame it on the Fed. Housing crisis? It’s all the Fed’s fault. Fed – or the Federal Reserve of America- has acquired the status of a global scapegoat in recent times. Whenever anything goes haywire with the economy, all fingers point towards Ben Bernanke, Chairman of the Federal Reserve. Trade pundits and critics alike are fed up of the Fed.

From the collapse of mortgaging giants to the rescue of investment banks, the Federal Reserve has, admittedly, had a busy year. And the future still does not look bright at all. The Federal Reserve might have to don the attire of Superman again in the nearby future, with another few banks teetering on the verge of collapse. Worse still, it also has to be at the receiving end of every public admonishment, since there is a general consensus that the US economy could have been in better shape if the Fed had exercised greater caution.

How far are we justified in laying the blame at the door of the Federal Reserve? It is true that the American economy is facing its worst crisis ever post-1930. Even Bernanke does not hesitate in pointing out that a “disaster in the markets” is not unlikely. The fact that the crisis is contagious is further depressing market sentiment. What was initially perceived as a restricted sub-prime mortgage crisis went on to affect real estate markets across the world. As if that was not enough, the global oil crisis – compounded by a weakening US dollar – came next. Meanwhile, Fannie Mae and Freddie Mac- the mortgaging backbone of America – needed a bailout. And just when you thought that the worst was over, there came the shocking collapse of Lehman Bothers. Merrill Lynch, fortunately, was destined for better things as it was sold off to the Bank of America. However, the American Insurance Group again needed some divine intervention by the Federal Reserve to stay in business.

One cannot deny that if the Federal Reserve had exercised an iron grip on money matters, things would not have come to this pass. However, it is irrational to blame the Fed for every crisis in the global markets. We have become accustomed to using the failure of central banks as convenient excuses. Whether it is the Reserve Bank of India or the Chancellor of the Exchequer in Britain, all have faced flak for their monetary policies. Since a recession in the US economy is likely to have a domino effect on economies the world over, the road ahead for the Federal Reserve is, admittedly, strewn with thorns.

It is natural to expect a tight-fisted monetary policy from the central bank when the world is reeling under the wave of inflation, but it is not reasonable to expect the Fed to salvage the entire banking system in the country. The crisis that the US is facing is a global phenomenon. The Federal Reserve has tried to soften its impact by bailing out several financial institutions, but how long it can continue to do this remains to be seen. The Federal Reserve can play the role of messiah only to a certain extent. Beyond that, the shock of the global crisis has to be passed on to the markets. In this scenario, the Fed should be lauded for what it has achieved so far, instead of being used as the common man’s flogging horse.

Namrata Singh

[Image source:http://www.gold-prices.biz/wp-content/img/2007/08/the-federal-reserve.JPG]

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