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Open Letter to Senator Charles Schumer September 20, 2008

Posted by The Armchair Economist in Business, Commentary, Economics, Politics.
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The Honorable Charles Schumer,

I am writing to you, as a constituent and resident of New York State, to share with you my thoughts and concerns regarding the Federal Reserve’s action in response to this week’s financial upheaval on Wall Street.

While I understand the necessity for swift and decisive action in order to stabilize financial markets, the actions outlined by the Federal Reserve do nothing to address the root cause of the sub-prime lending debacle. It is of my opinion that our problems derive from monetary policy driven by our exclusive reliance on continual economic expansion to fund increasingly large government programs (and an unpopular war), a policy that favors growth over stability.

As you know, the Federal Reserve has multiple roles as the central bank of the United States with key responsibilities that include managing the money supply via monetary policy, maintaining stability of the financial system by containing systemic risk. While the Fed has done an admirable job at controlling inflation while ensuring economic growth through manipulation of interest rates over the past decade, it has become obvious that they neglected their responsibility in containing systemic risk. The question is why the central bank did not act on repeated warnings, is the problem because the Federal Reserve has shifted its focus from risk management to ensuring the growth of the economy?

Recently, Henry Paulson even stated ”I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.. The financial security of all Americans … depends on our ability to restore our financial institutions to a sound footing.” There are two issues here that need to be separated and prioritized: Enabling monetary policy to fund economic expansion, or ensuring a sound foundation for our financial markets.

While painful, this time of crisis is the perfect time to give careful thought to putting forth policies that comply with original charter of the Federal Reserve and to not be hasty in making decisions that may act as only a temporary solution to a broader problem.

Regards,
The Armchair Economist

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