Horowitz: With the impending bank bailout and stagflation trap, it’s time to clip the wings of the Federal Reserve

We have no free market and never will have one so long as the Federal Reserve exists in its current form. It is the unelected judge, jury, and executioner of the economy that can pick winners and losers by manipulating credit and monetary policy to artificially inflate certain investments and investors at the expense of others. Years of unnaturally low interest rates have enriched well-connected woke elites at the expense of consumers and savers. Now that their Ponzi scheme is coming due, with the collapse of one of the wokest banks and the vicious cycle of stagflation and reliance on loose money, it’s time for conservatives and GOP presidential candidates to revisit the idea of either abolishing or severely limiting the role of the Fed.

For the past several generations, the Democrat Party thrived on class warfare. Democrats claimed that conservatives elevated the wealthy at the expense of the working class simply because they didn’t support free stuff and redistribution of wealth through an extremely progressive income tax on legitimately earned wealth. But it turns out that their policies have actually artificially enriched the wealthy and harmed middle-income consumers and savers, but unlike with our policies, the wealthy never earned these tendentious favors, nor are they constitutional.

In many respects, the Federal Reserve has more power than all three branches of government put together, yet the members never stand for reelection. For years, the Federal Reserve has created endless inflation and loose credit with near-zero interest rates and by buying up trillions of dollars of securities and treasuries. It distorted the market, allowed woke banks like Silicon Valley Bank to overextend themselves, and even become the primary lender for solar financing in America, based on Monopoly money.

Now that the Fed inevitably was forced to hike interest rates to curb some of the historic inflation it helped create, Silicon Valley Bank, along with Signature Bank in New York (the bank Barney Frank joined when he left Congress), collapsed and was taken over by the FDIC. But just like a frustrated teen losing a video game, the Federal Reserve and the Treasury Department are pulling the plug on the game so that their buddies don’t lose. Remember, until Friday, SVB’s CEO, Gregory Becker, was on the board of directors at the San Francisco Fed. It’s one big game of, by, and for the politically connected venture socialists.

Less than 10 hours after Treasury Secretary Janet Yellen promised there would be no new bank bailout, the Federal Reserve issued a statement Sunday evening announcing a spectacular bailout of every penny of deposits both at SVB and at Signature Bank. Except this one, unlike in 2008, won’t even require a vote in Congress, because the Federal Reserve and the Treasury Department have the backhanded tools to print money, even though we have reached the statutory debt limit.

“The financing will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral,” wrote the Fed. “These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.

In other words, they are back to printing money. The Fed has already grown its balance sheet by $4.7 trillion during the frenetic COVID money-pumping scheme (in addition to Congress’ $5.5 trillion fiscal stimulus), and has only off-loaded roughly $600 billion over the past year.

This was after many preceding years of ultra-loose monetary policy. Finally, as inflation reached record highs last year, the Fed began to ease up on those policies. Not any more! The Fed is promising to buy the assets “at par,” not at market value, which will have the effect of loosening bank credit beyond belief.

Additionally, along with the Treasury Department, the Fed will make $25 billion available as a backstop to this quantitative easing scam. The debt limit is a complete mockery, because evidently the Treasury Department can come up with vast sums of money on the fly, and this is likely the tip of the iceberg. Once the initial shock of this policy sets in, the debate will merely be over how many hundreds of billions are offered to stem the panic from other banks.

The immediate effect of this bailout will be to halt all interest rate hikes. As of this morning, the yield on the two-year Treasury note was down more than 80 basis points since last week, in anticipation of the return to loose credit. So the government will crush consumers with record inflation to bail out the well-connected woke (ESG-supporting) elites who took advantage of the unnatural and manipulated easy credit. John Edwards was indeed correct that there are two Americas, except it’s not because of a lack of government involvement. It’s because of too much big government, and particularly an unelected fourth branch of government that should be abolished.

If it’s impractical to immediately abolish the Federal Reserve, we should at a minimum remove its power to serve as both the arsonist and the firefighter. Congress must repeal the Humphrey-Hawkins bill from 1978, which empowers the Fed with a “dual mandate” to achieve maximum sustainable employment and keep prices stable. The Fed should be forced to focus solely on price stability. This would take “the game” out of the Fed. If it has no ability to create stimulus and provide monetary morphine, Wall Street can’t anticipate it and build an artificial economy based on its nourishment.

Market-distorting monetary manipulations are no different from market-distorting fiscal policy from the government. This is how the statists have successfully dissuaded us from ever limiting government. “You really plan to pull the rug out from under such-and-such industry?” the forces of special interests groan, be it health care or the financial sector. The same applies to monetary policy. There is no reason why we should allow the Fed to use monetary stimulus in such an officious manner that the entire market would collapse without the monetary morphine, even during robust economic growth.

The Fed should also be banned from buying up other securities and bonds, such as mortgage-backed securities from Freddie and Fannie. We must stop distorting the markets by encouraging investments on the basis of how much capital is available instead of real growth in a specific industry. It’s time to go back to the days of real economic growth built on the fiscal equivalent of protein and healthy fats, not sugar and carbs for the well-connected elites involved in regulatory capture.

We have enough lawless, unelected branches of government. It’s time to stop creating asset bubbles and misallocation of resources and return to a true organic equities market that reflects the economic realities of America. That will not happen until the Fed is brought under the checks and balances of the republic. As Andrew Jackson warned of a central bank, “The bold effort the present (central) bank had made to control the government … [is] but premonitions of the fate that awaits the American people should they be deluded into a perpetuation of this institution or the establishment of another like it."