The Federal Reserve Only One Part Of Our Complex Economic Factors

Fed Chairman Jerome Powell's statement on Jan. 26, following the latest meeting of the Federal Reserve System's Open Market Committee, signals very low interest rates and vast easy money injected in the economy are ending.

Per Powell, the Fed "is of a mind" to raise interest rates in March. The central bank is already reducing sustained purchases of Treasury and mortgaged-backed bonds.

Stock markets responded with volatility, but no drastic decline, so far. A major decline may well be coming, given the extraordinary situation today.

The financial collapse and recession of 2007-2008 provides relatively recent basis for comparison. That crisis was a result of extreme speculation in mortgage-backed securities in the U.S., and quickly became global.

The Great Depression provides important historic background. Stock market collapse in 1929 and extreme U.S. protectionism initiated decade-long hardship.

Along with great human suffering, the Great Depression fueled the rise of Nazism in Germany. The fundamental lessons of that period remain profound.

The 1929 stock market drop was sudden and steep. From the 381.17 peak on Sept. 3, U.S. stocks lost 25 percent value over two days.

November brought recovery, but that proved fleeting. Stocks drifted to the historic low of 41.22 in July 1932. During the height of the selling frenzy, they traded in volumes not reached again until the late 1960s.

Stocks did not return to the 1929 peak until 1954, in great contrast to more recent experience. Great public suspicion as well as hostility toward bankers defined American political life for decades.

After the 2007 crash, banks failed and others remained solvent only by emergency federal fund infusions. The Federal Deposit Insurance Corp., established during the Great Depression, proved up to the task of protecting individual depositors.

The 2008 bankruptcy of investment bank Lehman Brothers underscored the profound scale of the crisis. Government intervention, including liquidity, then was crucial to recovery.

Commercial banks became more regulated again, with capital requirements raised as part of rescue. In 2010, the Dodd-Frank Act became law, including the important initiative of Paul Volcker to separate commercial from investment banking funds.

Volcker as Fed Chairman defeated inflation in the early 1980s. Rising inflation is a principal policy concern today.

The U.S. central bank has led aggressive bond buying. Traditionally, the money supply and interest rates have been principal financial tools. The Fed today controls a relatively small share of total dollars. At the same time, the global reserve role of the dollar facilitates enormous bond purchases.

Finance is only one component of our complex economy. Money is a universally accepted means of exchange, but tangible value results from the work of vast diverse arrays of people.

Here is what we the people should remember. First, take pride in work. The U.S. has the most productive economy in the world. Our gross domestic product doubles about every two decades.

Second, as a citizen, be active. Government reforms reflect public pressures. There must be serious, sustained public oversight of financial activities.

Third, as an investor, do homework, starting with the classic book by Dodd and Graham, respectively a professor and a Wall Street genius, first published in 1934, regularly revised. You can read this while listening to media.

However, why not avoid that distraction? Nonstop electronic media are a poor investment.

Learn More: Benjamin Graham and David Dodd, "Security Analysis"

Arthur I. Cyr is author of "After the Cold War: American Foreign Policy, Europe and Asia" (NYU Press and Palgrave/Macmillan). Contact acyr@carthage.edu.

Arthur Cyr

Columnist