Professor of Practice John Allison says the Federal Reserve is Hindering the U.S. Economy

1.21.2012 Article, Capitalism, Faculty News

Kill the Fed
Reposted from Pittsburgh Tribune-Review | by Eric Heyl

John Allison is the former chairman and CEO of BB&T, the nation’s 10th-largest financial holding company. He was named one of the 100 most successful CEOs by the Harvard Business Review and since 2009 has been on the Wake Forest University Schools of Business faculty as Distinguished Professor of Practice.

Allison spoke to the Trib about the Federal Reserve Board’s detrimental effect on the nation’s slow recovery from the worst economic downturn since the Great Depression.

Q: Can the Fed be labeled more of a hindrance than a help to the recovery?

A: In my view, absolutely yes. You have a group of government bureaucrats who are in a massive redistribution of wealth in the United States. The Fed, by its own acknowledgement, is holding interest rates lower than they should be. They’re doing that to subsidize homeowners, many of whom bought too-big houses. And who pays for that? People who save money — particularly older people, who are now getting much lower interest rates on their certificates of deposit than they would be getting if we had a market-determined interest rate.

Q: What do you see as the primary problem with the Fed?

A: It’s a group of very smart, highly educated people with good intentions who have a problem they simply can’t solve. I don’t care how smart you are and how many models you have, you cannot really integrate the economic activity of 7 billion people on this planet. The Fed thinks they’re smarter than markets, which in fact they aren’t, and they’re constantly making mistakes.

Q: In the long term, what do you think should be done with the Fed?

A: If I were in charge, I would get rid of the Fed. I believe that as long as the Fed exists, Congress can effectively print money. And it doesn’t matter whether they are Democrats or Republicans, they would rather print money than tax people. They want to spend because that effectively buys votes, and they don’t want to tax people because that loses votes.

I think the Fed provides the temptation for massive government deficits. If the federal government couldn’t print money, it would have to have better financial discipline than it has today.

Q: Eliminating the Fed isn’t politically realistic though, is it?

A: One thing we could do that might be politically possible would be to go to a gold standard — you really would say a market-based standard, but I’m sure the market would pick gold and if it did that, it would impose a lot of discipline on the Fed.

If you go back to 1971, when Nixon disconnected the dollar from gold, the purpose was to run national deficits. If they had a gold standard, they literally couldn’t do it because they were going to run out of gold. So I think a practical solution (now) is to force discipline on the Fed by having the dollar convertible into gold.

Q: Do you see that as a viable alternative, or do you see Congress just continuing to spend wildly out of control?

A: I think it’s possible, particularly if this European crisis unfolds and gets worse — it may or may not. But today could you get it done? No. Today, Congress just likes to be able to print money. They like to be able to spend more money than they have. Both sides like that.

Taking long-term responsibility is not what Congress likes to do. But at some point, there will have to be some discipline in the system or we will get in serious financial trouble in the long term.