Even central bank critic U.S. Rep. Ron Paul is surprised that both his colleagues and the nation now listen to his calls for an audit of the notoriously untouchable Federal Reserve. Paul has represented Texas for 22 years and, as a Libertarian, he actually believes that the Fed should be abolished, but he will settle for the next best step. Meanwhile, even longer than Ron Paul has campaigned against the Fed, Bob Prechter has steadily built the case that the Fed is powerless to change the trends in the economy. He thinks the biggest mistake is to view the Fed as a leader rather than a follower of the markets. Here's an excerpt from his question-and-answer book, Prechter's Perspective, which describes why the financial markets trump the Fed's moves.
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Aren't there instances in which the government can intervene in ways to throw the Wave Principle off? A lot of people say the Fed stepped in and bought futures after the crash of 1987, for instance. Isn't that an example of enlightened government action?
Bob Prechter: First, remember that the Fed did not prevent the 1987 crash. It happened. Many claim that the Fed averted further collapse, but in our opinion, it acted on the day the market was due to bottom anyway, the evidence being that The Elliott Wave Theorist said in print four days earlier that the two-week cycle was due to bottom on October 20, and the market bottomed that morning. Then there's what happened in 1929 when a consortium of bankers amassed a pool of money to halt the October decline. On the strength of that buying and the resulting euphoria, stocks soared, for one day. Then they fell even harder, utterly ignoring a second attempt at "organized support" on the 28th. History provides several examples of failed attempts to stop a market collapse.
The unprecedented popularity of [former Federal Reserve Chairman] Alan Greenspan suggests that most people believe in the power of the Fed to prevent a crash.
Bob Prechter: The Fed's apparent success in 1987 made people, including Fed governors, confident that they can stop the next crash. But it won't work (more than briefly, anyway), because the wave of selling will be much bigger. When the Fed itself, then the professionals and soon afterward the public, realize that the Fed's attempt is failing, the overall panic will increase, at minimum negating any bullish effects of whatever actions it takes.
But there are no restrictions on the Fed, and, in recent years, especially in "crisis situations," we have seen there is no hesitancy to do whatever it takes to bail out troubled entities. Won't the Fed just lend its way out of the problem?
Bob Prechter: While it is true that the Fed has an unlimited power to offer credit, it cannot create liquidity, because it cannot force businesses and consumers to lend and borrow no matter how cheaply it offers credit. So deflation can happen regardless of the Fed's desires. As I see it, there are only two possibilities: (1) The Fed will act on the bottom day of a collapse and appear to have been effective, or (2) it will try to stem the tide early and fail. Either way, the market's ultimate destiny will be unaffected. Only people's thinking will be affected. Hope-filled bulls will hold on for the slaughter and irresolute bears will give up their positions. In other words, the main effect of this soothing news will be to produce a psychological deterrent to proper investment action.
The Fed has always been a focal point for the financial markets. In recent years, people's attention is absolutely riveted on every Fed meeting. Is this attention misplaced?
Bob Prechter: The obsession with the Fed's meetings is ludicrous. The Fed votes only to change its own rates, and it has always followed the rates set by the free market. In 1999 and 2000, when the Fed raised rates several times, it was repeatedly claimed everywhere that the Fed was conducting a "pre-emptive strike against inflation." But rates had been rising for months, and the Fed simply adjusted to the market, as always. We watch the market, which leads the Fed.
In the wake of an unexpected central bank action, have you ever had a wave pattern that skipped a beat or altered its course in any way?
Bob Prechter: Central bank action is never really unexpected because it's a product of the social mood, which permeates society. When you examine the charts, you can locate waves, but you can't locate central bank actions. Central bankers hope and panic and make decisions the same way the public does. Bankers are people, too, after all. They say, "We've got to react to this new condition. We've got to move money here. We've got to move money there." They are racing back and forth in rhythm with the market.