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The Federal Reserve System is one of the very few good ideas our Congress has created, because it takes monetary policy out of the hands of lawmakers who have very little clue what they're doing, and puts it into the hands of the nations top economists. The Chairmanship is also staggered opposite that of the Presidential election cycle, further serving to de-politicize it.

The US Constitution grants the power to regulate monetary policy to the US Congress, in Article I. But the US Congress is mostly made up of people with law degrees, who demonstrate OVER AND OVER AGAIN their complete incompetence in all matters monetary. In a momentary flash of fleeting and temporary wisdom, they abdicated that responsibility to people who WERE competent in monetary policy.

The purpose of the Federal Reserve System is to smooth out the waves of the capitalist cycle. What that means is that in a perfectly laissez-faire economy with no government intervention, a market economy will fluctuate back and forth between "Boom" and "Bust". An economy will grow until the situation overheats, then will bottom out, before starting up again. This is a phenomenon that's slightly too complicated to discuss here, but can be found in any intro level macroeconomics textbook, even at high school level.

The Federal Reserve uses it's influence on the level of liquid money available in the system, as well as the rates it charges banks for internal loans, and other monetary tools, to slow down the growth of the system before it gets overheated, and to attempt to buffer the downtimes to make for "soft landings" instead of "crashes". Obviously, it's not a perfect system, and unexpected shocks to the system can still cause problems, but under good leadership and sound, prudent strategies, the Federal Reserve System has shown its ability to work as designed. Dr. Alan Greenspan is a brilliant example of a Federal Reserve Chairman who knew his role and played it properly, helping effect almost 20 years of unprecedented growth in the system.

In fact, his ability to minimize the potentially catastrophic effects of the September 11, 2001 terrorist attacks on the economy can not be overstated. Given the panicked atmosphere in the stock and bond markets in the following days, it would not be outrageous to speculate that a crash and depression on the scale of the Great Depression of the 1930's to have been possible. Instead, Chairman Greenspan quickly and deftly moved to slash interest rates, spurring investment and indeed triggering a boom in housing and construction, which is only now ending. Those same rates also initiated a boom in mortgage refinances, which have allowed millions of Americans to lock in low rate mortgage loans and afford homes they otherwise would not have been able to.

Learn more about this author, Tad Wesley.
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