Thank you!
Your support is sustaining the future of local news in our communities.

The Fed’s role in populism

The Federal Reserve Bank is the most powerful central bank in the world. It has a long history of successes and at times, failures in steering the U.S. economy through ups and downs. This is a story of how a well-intentioned policy has resulted in one of the worst disasters in American history.

After the stock market crash on Oct. 19, 1987, just two months after Alan Greenspan assumed the chairmanship of the Federal Reserve bank, he fired off a one-sentence statement before the start of trading on October 20th, “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” It was enough to turn markets around and kick off an economic expansion that lasted for ten years.

The Fed soon realized that it might be able to smooth out the bumps in the business cycle and the economy by using monetary policy. They tried and succeeded in doing so in the early 1990s to combat a credit crunch, a Russian default on government securities, and the overheating of the U.S. labor market in 1994. As a result, the decade was marked by generally declining inflation and the longest peacetime economic expansion in our nation’s history.

How exactly does the Fed work its magic? Think of monetary policy as a money spigot. When the Fed believes the economy is going to enter a slow patch, it turns on the money spigot. It turns the spigot off when it fears the economy is overheating, which could cause inflation. Simple, right?

It was a wonderful discovery. The government, through the Fed’s actions and its fiscal spending, could minimize unemployment and ensure price stability by controlling the money supply if the dollar maintained its status as the world’s preeminent currency.

However, money is distributed into the economy in a certain way — through the banking system in the form of lower interest rates. Interest rates are the cost of money when borrowed. The lower the rate, the cheaper the money. Banks offer loans to borrowers and these loans flow from the top down. Therein lies the problem.

Take a guess who gets to borrow the lion’s share of this easy money?

Corporations, of course, are followed by the wealthy who own them. The biggest, most profitable companies get to borrow the most at the lowest rates. The same top-down mentality pervades our fiscal policy efforts. Who, for example, will receive the $90 billion in new spending for Ukraine? It will be defense companies, arms suppliers, munition distributors, etc.

From the government’s and the Fed’s point of view, this is the most efficient means available to inject monetary stimulus into the economy. The Fed also realized that with their top-down efficient capital approach, monetary loosening was not by itself inflationary.

In this top-down situation, what happens to those who are at the bottom of the borrowing chain? Is this fair, and if so, how do they benefit?

Well, that is where Trickle-down Reaganomics is supposed to come in. Corporations and other wealthy borrowers, according to supply-side economists, would invest in new plants and equipment, which would bring new jobs and higher pay to the masses. Economists used the same arguments for tax cuts as well. It may have worked in the 1980s, although many have their doubts, but it didn’t work in the 1990s, or any time since then. Why?


Bill Schmick is a founding partner of Onota Partners Inc. in the Berkshires. None of his commentary is or should be considered investment advice. Email him at bill@-schmicksretiredinvestor.com.

The views expressed here are not necessarily those of The Lakeville Journal and The Journal does not support or oppose candidates for public office.

Latest News

Recovery underway after July 4 storms devastate Northwest Corner

Ben Blackwell directs traffic in Salisbury as motorists navigate road closures caused by fallen trees.

Patrick L. Sullivan

This is a developing story.

After a series of extreme storms pummeled the Northwest Corner late July 4, communities are picking up the pieces and offering support to those affected by blocked roads, downed power lines, and power and water outages.

Keep ReadingShow less
Storms rip through Northwest Corner on July 4, stranding travelers, closing roads and knocking out power

A blocked road on Route 41 in Salisbury looking north at Cobble Road.

Patrick L. Sullivan

Updated July 5, 10:00 a.m.

What began as a picture-perfect Independence Day took an abrupt turn Saturday evening, as powerful thunderstorms and possible microbursts swept across the Northwest Corner, bringing down trees and power lines, closing roads and leaving many residents unable to reach home.

Keep ReadingShow less
Kent's Fourth of July plans change due to heat, potential storms

The Veteran’s Memorial is set to receive a new plaque commemorating Kent’s 44 known Revolutionary War servicemen. The stone will be displayed throughout the weekend’s USA 250 celebrations.

Alec Linden

KENT – Kent organizers made last-minute changes to the town's Independence Day celebrations due to extreme heat and possible storms, bringing some activities inside and making slight changes to the parade. Fireworks at Lake Waramaug are planned as scheduled.

Members of the town’s USA 250 Subcommittee made the changes during a July 1 after the National Weather Service issued an extreme heat warning. With temperatures expected to reach the low to mid-90s, Gov. Ned Lamont also activated Connecticut's Extreme Hot Weather Protocol on Tuesday, which remains in effect through Sunday.

Keep ReadingShow less
google preferred source

Want more of our stories on Google? Click here to make us a Preferred Source.

E. Jean Carroll backs out of book-signing event at Hotchkiss Library for safety reasons

The Hotchkiss Library of Sharon will host its 28th annual Sharon Summer Book Signing event July 31 through Aug. 2.

Aly Morrissey

SHARON – Facing threats of violence amid a public dispute with President Donald J. Trump, famed author and journalist E. Jean Carroll is no longer expected to attend a highly anticipated book-signing at The Hotchkiss Library of Sharon, though library officials said they have not received formal notice that she has canceled.

The meet and greet was originally scheduled for Aug. 1 as part of the library’s Sharon Summer Book Signing event – which will take place as planned – but Library Director Gretchen Hachmeister said July 2 that Carroll’s attendance is no longer expected. She said the writer is allegedly in an undisclosed location under police protection after receiving death threats related to a recent Supreme Court decision and the president’s subsequent posts on social media.

Keep ReadingShow less

HVRHS Announces Senior Awards

HVRHS Announces Senior Awards

Senior awards for the HVRHS Class of 2026 have been announced.

Nathan Miller

The Housatonic Valley Regional High School senior awards were announced for the Class of 2026. The graduation ceremony was held Friday, June 19. Student speakers acknowledged the importance of community, as several reflected on overcoming significant adversity in their young lives.

Norma Lake Award - Shanaya Duprey

Keep ReadingShow less

The nature of Upstate Art Weekend

The nature of Upstate Art Weekend
Opening of Upstate Art Weekend at Olana with Helen Toomer, Ellen Harvey, Jean Shin and Gabriela Salazar
D.H. Callahan

On Thursday, June 25, a collection of eager art enthusiasts gathered at Olana State Historic Estate in Hudson to kick off the seventh annual Upstate Art Weekend (UAW).

Helen Toomer, founder, was joined by sculptors Ellen Harvey, Jean Shin and Gabriela Salazar to discuss their work and the legacy of painter Frederic Church. Church, whose 200th birthday is being celebrated this year, is widely credited as one of the founding members of the Hudson River School of painting. The discussion took place at Olana, Church’s grand estate, where the three artists’ installations are on view.

Keep ReadingShow less
google preferred source

Want more of our stories on Google? Click here to make us a Preferred Source.

google preferred source

Want more of our stories on Google? Click here to make us a Preferred Source.