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Michael Eisenga Discusses the Federal Reserve: Is it a Force for Good or Harm?

Originally published on theodysseyonline.com

Over a hundred years ago, Congress signed the Federal Reserve Act that founded the central bank of the U.S. It is meant to help maintain economic stability in the face of financial crises. Before the Federal Reserve was created, the crises led people to take all of their money from banks, leaving them without any emergency funds and driving them out of business.

The Purpose of the Federal Reserve

The goal of the Federal Reserve is to maintain a safe, flexible, and stable financial system. It regulates interest rates based on the economic ups and downs to either slow the consumers' financial decisions or incentivize businesses to invest and borrow more. While deciding whether to adjust interest rates or maintain them, the central bank looks at the employment rate and how stable the prices are. In the ideal scenario, everyone can find a job, and inflation is under control, meaning around 2% as the goal. 

Recently, the Federal Reserve played an essential role in regulating the economy during and post-pandemic; still, many people believe it is unregulated and unconstitutional. Let's look at ways in which it is thought that the Federal Reserve is harming the economy more than helping it.

Currency Devaluation

Although many American families needed stimulus checks to stay afloat, many are concerned that handing out free money will raise inflation. When the Federal Bank prints dollars, it increases supply and decreases the demand, ultimately reducing our currency's value. This, in turn, contributes to monetary inflation. Since 1913 when the Federal Reserve was founded, the dollar has lost 96% of its value. When a currency loses its value, it diminishes its purchasing power internationally, increasing the costs consumers pay for goods and services. Lower and middle-income families are usually affected the most by this process since many keep their savings in currency and often don't have alternative investments.

Capital and Economic Losses

During the pandemic, the Fed lowered interest rates to near-zero, looking to encourage economic growth. When the Federal Reserve lowers interest rates below the market rates, it usually leads to businesses and individuals taking on more debt and increasing their production. However, in retrospect, these investments often turn out to be a bad allocation of resources and lead to lost capital and economic losses since they were based on artificially low costs of credit. Many consumers tend to make purchases based on the low interest rates even if they weren't planning on making them to begin with.

In Conclusion 

Since its foundation, the Federal Reserve has been a crucial part of the U.S. economy, deciding the purchasing power of the American dollar. As American voters do not select the Board of Governors at the Federal Reserve, it is believed by some to be unaccountable and serve the privileged few instead of average citizens. It is evident in retrospect that the Federal Reserve is not perfect; however, overall I feel the Federal Reserve does more good than harm as it can keep borrowing costs low thus lessening the chance of a severe financial crisis.

About Michael Eisenga

Michael Eisenga is a successful commercial real estate investor with a banking and finance background and is the former mayor of the City of Columbus. As a President of both American Lending Solutions, a mortgage lending company (he founded and operated from 2000 to 2018), and First American Properties, he has a track record of creating and operating successful businesses. Mr. Eisenga is also devoted to property development and construction, primarily serving smaller local communities. Especially in the senior housing sector.

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