Is the Fed killing the economy?

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LONDON, United Kingdom — Accusing major financial institutions of malign plots to undermine currencies and topple governments — that used to be the preserve of conspiracy nuts obsessed with satanic cults or reptilian overlords.

Now, it has gone mainstream.

It is hardly surprising. The global economy is reeling, legions are unemployed and entire nations flirt with bankruptcy — even as a rich minority continues to wallow in wealth. You don’t have to be an avid Dan Brown or Robert Ludlum reader to suspect something untoward might be going on.

Against this backdrop, opinions once consigned to the fringe are gaining mainstream traction. Republican presidential hopefuls such as Ron Paul and Rick Perry lead the charge — alongside the rapidly-evolving Occupy Wall Street campaign — to reform the global banking sector.

Their chief target is the Federal Reserve, the U.S. central bank system whose relentless tinkering with the American — and consequently the world’s — economy, in an effort to maintain high employment and low inflation, is said by many to be doing more harm than good.

Believers in pure free market economics have long been irked by the Fed’s activities. In their perfect world, things like interest rates should be set simply through the equilibrium of how much money people are willing to save, versus how much people are prepared to pay to borrow.

They say efforts by central banks, such as the Fed or the Bank of England, to set artificially low interest rates — done by varying the amount of money they lend — are dangerously counterproductive. This, they say, encourages people to borrow more, but save less.

So imagine their dismay as, even after the 2007 explosion of the debt-fueled housing bubble, the Fed — under the leadership of Chairman Ben Bernanke — continues to tinker with quantitative easing, a controversial bond-buying program that effectively creates money to encourage borrowing.

Texas Governor Rick Perry’s response was incendiary. In August, just after the explosive debate over raising the $14.3 trillion debt ceiling, Bernanke’s Fed mulled a possible third round of quantitative easing. Perry snapped.

“Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous in my opinion," he said. He also suggested that Bernanke’s policies would earn him an “ugly” reception in Perry’s home state of Texas.

When it comes to criticizing the central banking system, Perry is way behind U.S. Congressman and fellow Republican Ron Paul, who outlined his views in a 2009 book unequivocally titled: “End the Fed”.

Laying down a mantra that he continues to recite today, Paul wrote: "Nothing good can come from the Federal Reserve. It is the biggest taxer of them all. Diluting the value of the dollar by increasing its supply is a vicious, sinister tax on the poor and middle class."

Paul identifies with a group of late 19th century European free market economists known as the Austrian School, among them Friedrich Hayek and Ludwig von Mises, whose theory of business cycles opposes the planned economic principals that contributed to the Fed’s creation in 1913.

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According to Sam Bowman, head of research at the Adam Smith Institute, a London-based free-market think tank, Paul’s populist diatribes on the collapse of the U.S. housing market, coupled with strong advocacy by well-regarded economists at George Mason University in Washington D.C., has lent new credibility to the previously fringe Austrian School.

“George Mason has more or less created a very interesting, quite well respected economics department that is talking about this in a way that a lot of academics are now listening,” he told GlobalPost.

“The other side of that is obviously Ron Paul and his political movement, which has gained strength because the housing bubble is intuitively easier to grasp than other bubbles: people understand the concept of cheap credit and too much investment.

“This narrative has made a lot of people ask what the root cause of this was. The Ron Paul argument is not a perfect one, but it has managed to convey Austrian business cycle theory in a way that people find interesting.”

Of course, criticizing the Fed isn’t a new sport. President Woodrow Wilson, who signed it into existence following financial panics in the early 20th century, spoke afterwards of “unwittingly ruining his country” by putting it in hock to a “small group of dominant men.”

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Remarks like these, and the commonly asserted claim that it was also ushered into being to help fund World War I, have also helped nurture wilder allegations that the Fed and its equivalent in other countries are beholden to more powerful puppet masters.

Some claim that the Swiss-based Bank of International Settlements, an independent body dedicated to ensuring the financial stability of its 58 member nations, is directing central banks to willfully destroy economies in order to line the pockets of a global elite.

At their most extreme, conspiracy theorists also draw an elaborate web of intrigue involving a litany of usual suspects: England’s wealthy Rothschild banking family; the satanic Illuminati cult; and Zionist plotters — not to mention shape-shifting lizards from another planet.

Back in the real world, Bowman insisted that the days of centrally-managed banking could be numbered in the U.S. and other countries. He said reversion to the free market or gold standard principles upon which economies once operated is a genuine possibility as current mechanisms continue to struggle with the crisis.

“When that will happen I have no idea, but the relatively recent establishment of central banks probably means they’re not here forever.”