Economic populist William Greider, writing in The Nation, makes the case against the Fed.
Six reasons why granting the Fed even more power is a really bad idea:
1.†ˆIt would reward failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction …The Fed instead allowed, even encouraged, the explosion of debt and inflation of financial assets that have now collapsed….
2.†ˆCumulatively, Fed policy was a central force in destabilizing the US economy. Its extreme swings in monetary policy, combined with utter disregard for timely regulatory enforcement, steadily shifted economic rewards away from the real economy of production, work and wages and toward the financial realm, where profits and incomes were wildly inflated by false valuations…
3.†ˆThe Fed cannot possibly examine "systemic risk" objectively because it helped to create the very structural flaws that led to breakdown….
4.†ˆThe Fed can't be trusted to defend the public in its private deal-making with bank executives…
5.†ˆInstead of disowning the notorious policy of "too big to fail," the Fed will be bound to embrace the doctrine more explicitly as "systemic risk" regulator. A new superclass of forty or fifty financial giants will emerge ….The Fed, having restored and consolidated the battered Wall Street club, will doubtless also shield a few of the largest industrial-financial corporations, like General Electric (whose CEO also sits on the New York Fed board). Whatever officials may claim, financial-market investors will understand that these mammoth institutions are insured against failure…
6.†ˆThis road leads to the corporate state–a fusion of private and public power, a privileged club that dominates everything else from the top down….
It's a pretty good list especially the points that too big to fail will be embraced even more under the idea of a "systemic risk regulator" and that this road leads to the corporate state. Just consider the implications of Gary Gorton's proposal for the government to guarantee "senior tranches of securitizations of approved asset classes."
The natural conclusion of Greider's damning list would seem to be a monetary system truly independent of politics such as a commodity standard or free banking. Sadly, but not surprisingly, Greider's own proposal for a Congressional Monetary Office, something like the Congressional Budget Office, solves none of the fundamental problems.
What we need is matching time horizons to capital. As with most problems we are planning to waste trillions of dollars on, the solution is more like a website (perhaps futarchy) than a government program.
As for complicating problems, I looked at a map of Africa and one of their problems jumped out at me. Here’s a summary.
http://en.wikipedia.org/wiki/African_currency#Present_Currencies
As much this blog has mocked them in the past, the gold bugs may be correct. A commodity standard seems like a good idea if you want to have a universal monetary system.
However, honestly, I think i’d prefer going back to a non-monopoly currency system.
Obligatory link to Murray Rothbard:
The Case Against the Fed
Lock him in a room with Ron Paul talking gold.
I prefer the dissolution of the US government by peaceful means, but I’m a wierdo.
Tyler makes a good point. Eliminating the Fed’s responsibility for everything other than lender of last resort should be the goal. Anyone who has studied the history of financial systems under commodity standards is familiar with the fact that there were still financial panics, often caused by liquidity crises, that required some sort of infusion of liquidity until the panic died down. Whether its the Fed or some other body, it’s probably still a good idea to have a mechanism in place. There needs to be very strict regulations though so that the institution doesn’t go all Greenspan and flood the market with liquidity every time there’s a recession, because all that inevitably leads to is a solvency crisis down the road, which the new institution will not be able to help with.
Tyler’s suggestion that the Fed makes for a better lender of last resort than Congress might begs the question, do we need a lender of last resort at all? A careful reading of monetary history suggests a negative answer. Thus Bagehot himself clearly regarded his “classical” LOLR formula as a second-best alternative to doing without a central bank; and the turn to central banking in the U.S. came only after numerous attempts to deregulate national and state banks (by abolishing restrictions on branch banking and freedom to issue notes) failed to make it through Congress.
I urge anyone who remains convinced of the need for a public LOLR to have a look at my 1989 Cato Monetary Conference article. Although a lot has happened since then, it has only served to reinforce my original views on the subject.
Yes, without a lender of last resort how could we save Goldman Sachs and all the other people who leveraged up 40-1 on AIG issued CDS?! these good people need our help. It is our duty to sacrifice for them.
Clearly, civilization would end without Henry Paulson’s friends making billions of dollars a year. right?
and imagine how terrible things would be if we didn’t have Government Motors…we’d all be walking to work. Do you guys not like cars now?
Clearly we need more loans to fix our problems and the lender of last resort is here for good. All serious people agree.
1)The purpose according to the court intellectuals?
or
2) the purpose according to the people who came up with the idea and pushed for the legislation?
people in favor of the fed will give you answer 1…people against the fed will give you answer 2.
Lender of last resort is a fallacy. One is pretending there is some entity that cannot become insolvent, thus backstopping all the other entities that can.
For an excellent understanding of what free banking could really accomplish, George Selgin’s books are among the best. However, given human nature, as most ruthlessly displayed by our political activity, the FED will never be terminated voluntarily.
The fact that today’s $1.00 bill doesn’t have the purchasing power of a 1913 penney reveals the FED’s purpose behind Gabe’s door number 2. A stealth tax via inflation. It also reveals the FED’s purpose behind Gabe’s door number 1: A stealth tax via inflation (I know CI’s would try to say stabilization of prices and low unemployment but reality has trumped this POV).
It is a cash cow that all politicians are addicted to and while I sympathize with Tyler on this (if we get rid of the FED we’d end up with Congress which would be worse) I think things must get worse before they can get better. We need to make all the empirical mistakes possible before we will allow ourselves to go down the path of commerce without coercion. So lets abolish the FED.
Another question. What would be the effect of the US de-chartering its central bank, but the other central banks such as the ECB, the Bank of England, the Bank of China, and the Bank of Japan continuing to exist?
I realize that the political and economic environment where the Fed is actually abolished would be so different from today that my question is probably impossible to answer.
Are there any historical examples of a country getting rid of its central bank? There is the 1830s abolishment of the Bank of the US, is that a real parellel? John Law’s bank was too experimental to be a good precedent.
There was also the later Roman Empire’s success in stabilizing its currency but this came coincident with a contraction of the empire.
What was the longest “market crisis” before the advent of the Fed? How about after? I don’t recall any 10 year crisis in the 1800′s. Besides the “big one,GD1″ and a long period of global dominance after WW2 , it seems like we’ve been in almost continuous crisis since the end of Bretton-Woods. I just don’t see how the ability to inflate helps people like me in the least.
daddysteve:
Your grasp of economic history is remarkably poor. The Long Depression predates the Fed:
“In the United States, the Long Depression began with the Panic of 1873. The National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879. At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression’s 43 months of contraction.[1] [2] Following the end of the episode in 1879, the U.S. economy would remain unstable, experiencing recessions for 114 of the 253 months until January 1901.[1]”
While the value of central banking is highly debatable, the fact is that economic crises seem to occur regardless of whether a central bank exists. Bubbles (Tulipmania and the South Seas bubble are two particularly infamous ones) were around long before the establishment of the modern financial system.
Economists generally agree that we’ve seen a “great moderation” since the establishment of modern central banking in the mid-20th century. While the actual sustainability of this moderation is questionable, its short-term existence (for decades-long values of “short-term”) is hard to dispute.
As for why economists think some mild inflation is generally good, see my comments on Alex’s other post.
The best proposal out of Greider’s very interesting piece was, “Congress should create a stand-alone development fund for long-term capital investment projects (this would require the long-sought reform of the federal budget, which makes no distinction between current operating spending and long-term investment). The Fed would continue to create money only as needed by the economy; but instead of injecting this money into the banking system, a portion of it would go directly to the capital investment fund, earmarked by Congress for specific projects of great urgency.”
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