The Daily O’Collegian

There ain’t no such thing as a free lunch. Double negatives aside, that adage was popularized by economists and others to convey the idea that there are costs behind most everything, no matter how free they may appear.

It’s not odd to believe in quid pro quo, because this sort of relative analysis helps us understand the consequences—both positive and negative—of our actions.

What are the costs versus the gains?

What is the cost of choosing one option over the other?

How can our choices ripple to cause effects later?

These are all questions that should be asked, and as the Federal Reserve plans to continue to act, these questions should be asked of them as well.

The Federal Reserve and its chairman, Ben Bernanke, control a key short-term interest rate, which they can lower to stimulate the economy.Lower interest rates result in a lower cost for borrowing money.

Friday, the Washington Post reported Bernanke signaled the Federal Reserve will continue to act “in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability”.

The markets certainly would welcome a reduction in costs, but the Federal Reserve is not an all-powerful institution that can make economic growth magically appear. There is a cost to their actions, namely the weakening of our dollar.

Interest rates are not arbitrary numbers. They represent the price of money, and as with the price of any asset, only by manipulating the supply or demand of money can one actively alter its price.

Managing demand for the dollar would be unwieldy, but the supply is something that can be controlled. After all, the federal government is responsible for the existence of the currency in the first place.

While the Federal Reserve doesn’t indicate that it has to increase the money supply to lower its interest rate, the effects of more money in the market is felt nonetheless.

The value of the dollar diminished against both hard assets like oil and against other currencies immediately after the Federal Reserve started to lower its interest rate toward the end of 2007.

A Jan. 8 Associated Press article reported “many analysts believe the weakening dollar helped draw speculative investors into oil markets this fall and winter, driving oil prices above $100 a barrel last week”.

Unfortunately, a higher price for oil just trickles down to the consumer, and other increased costs will do the same.

A weaker dollar makes imports more expensive and provides incentives for American firms to export their products instead of keeping them here. Both situations are not beneficial for the average American.

So, monetary policy is a mixed bag. The Federal Reserve can provide a comfort blanket to the markets but cannot address fundamental economic issues by playing with the money supply.

The costs attached to providing more credit opportunities to firms end up falling on the shoulders of common Americans.

Combating a recession is not free, so Bernanke should be mindful of the effects his organization has. Just like any other decision, it must be asked: do the gains outweigh the costs?