The magic to "smooth out the risk inherent in any market" is to let the interest rates be set by market forces, which will inevitably (almost magically one migh

The magic to "smooth out the risk inherent in any market" is to let the interest rates be set by market forces, which will inevitably (almost magically one might say) through the principle of competition, set the interest rates at the level which the available capital in the market can bear. The speculative investing which you assume as a given is not a given if money is only so cheap as the resources in the economy which support it. However, decouple the market from interest rates, and drive those rates down to a level which the capital in the economy cannot support, and you create a demand glut for resources. The market, if left to itself, is automatically self regulating, both in regards to the price of consumable goods, and in regards to the ability of speculative investors to obtain cheap money. Such a market punishes speculators who fail with interest rates appropriate to the level of risk. It cannot do this, however, when those rates are set artificially by a central bank. Though the Fed is an independent institution on paper, they serve at the behest of Congress and the President. For all practical purposes they are an arm of the Federal government, exercising power from on high, and dictating to the market how it will run. Appealing to Zimbabwe as a counter-example, as did the previous commenter, is an example of cognitive dissonance. Zimbabwe is a perfect example of what happens when the government does NOT let the market self-regulate, when, rather, the government sets prices and interest rates, distributes property, and prints massive quantities of fiat money to compensate for its inability to create true wealth. No government, no matter how much control it exercises, can possibly manage an economy better than the economy can manage itself. It is too big a beast, too complex, with too many interlocking parts.