Posted by Mike Beene - So the news is that the Federal Reserve will keep interest rates at current levels until 2013. Experts are stunned that the Fed would even mention its plans for a date that far into the future. How might this affect the Self-Employed?
Let’s look briefly at the sometimes mysterious Federal Reserve. I find that few people have a true understanding of the institution past some vague recollection from high school civics. Created by congress in 1913, the Federal Reserve System (Fed) is the central bank of the United States. Today it is much more, and in addition to its banking system responsibilities, the Fed is charged with conducting the nation’s monetary policy.
Congress charges the Fed with a dual mandate: full employment and stable prices. These goals are generally addressed through the Fed’s ability to control the amount of money in circulation and, thus, hopefully to influence interest rates. The Fed must fulfill this mandate with the tools the law provides, and it pays banks interest rates on the portion of reserves that they keep with the Fed. The Fed also attempts to influence interest rates by buying treasury bonds. This ultimately increases the money supply (and some call this process “printing money”) because the Fed is, in effect, creating funds to buy the bonds. The Fed says that most of its purchases are of old bonds and therefore that it is not financing the new debt the U.S. is incurring. The Fed hopes to lower long term interest rates through this practice.
All this sounds good, but our 15 trillion dollar economy can’t seem to grow and the U.S. falls farther into debt. And the loans are not getting to Main Street. The Fed last year held a major summit on small business lending which I attended on behalf of the self-employed. I am convinced there is true concern for Main Street. However, the Fed is not all powerful and often good intentioned government solutions, such as regulation to help consumers, does more harm than good by adding confusion and uncertainty. The Fed has attempted to loosen regulation on lenders in hopes they will make more loans, and the Small Business Administration has several incentive programs to get lenders moving.
The best service the government can give us is to get our fiscal house in order so we can again have the confidence to pursue the American dream. It is time once more for government to take a step back and let our micro-businesses, old and new, lead us back to prosperity.