Delete the Fed

The fact is, we need the Federal Reserve like we need a hole in the head.

Who should run the Federal Reserve System when chairman Ben Bernanke’s term expires next year: Vice Chair Janet Yellen or former Obama adviser Lawrence Summers?

Neither.

Who then?

No one.

The fact is, we need the Federal Reserve like we need a hole in the head. Contrary to folklore, the Fed is not needed to stabilize the economy or to prevent unemployment. As the Fed heads into its second century, we ought to realize that its record is terrible. Even if we don’t count the interwar period (which some economists call the new Fed’s practice round), America’s central bank is a flop. Monetary economists George A. Selgin, William D. Lastrapes, and Lawrence H. White wrote in “Has the Fed Been a Failure?”:

Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I.

The authors support that generalization with details. On inflation: “Far from achieving long-run price stability, [the Fed] has allowed the purchasing power of the U.S. dollar, which was hardly different on the eve of the Fed‘s creation from what it had been at the time of the dollar’s establishment as the official U.S. monetary unit, to fall dramatically” — by 95 percent.

Selgin, Lastrapes, and White also show that the central bank has given us longer recessions and slower recoveries.

But without the Fed, who would set interest rates to guide the economy? The first answer is that government policy and Fed manipulations can create the very recessions that the Fed then tries to reverse. If the politicians and their court economists would get over their hubristic belief that they are stewards of the economy, macroeconomic crises would disappear.

Besides, the Fed cannot set interest rates, not even its narrow federal-funds rate for overnight interbank loans. At most, it targets that rate by buying and selling government securities, but it doesn’t always hit its target. The idea that the Fed can even heavily influence mortgage and other interest rates ignores important facts.

First, the Fed’s operations are small compared to the complex U.S. and world economies. Writes monetary economist Richard Timberlake,

Traditional economics properly teaches that many complex market forces — countless investment and savings decisions not dependent on monetary factors — are essential in determining interest rates. The Fed funds rate that Fed policy can influence through its monopoly over the quantity of money is inconsequential in shaping most short-term and long-term rates in capital markets, unless that moneymaking power subsequently promotes a pervasive price inflation. [Emphasis added.]

Second, the Fed can’t lower rates through monetary inflation beyond the very short run. Why not? Because lenders will respond by raising their rates to avoid being screwed by price inflation – unless the Fed prevents the inflation, as it’s been doing, by effectively borrowing back the new money from the banks at interest.

Moreover, as monetary economist Jeffrey Rogers Hummel points out,

Globalization, with the corresponding relaxation of exchange controls in all major countries, allows [investors] easily to flee to foreign currencies, with the result that changes in central-bank policy are almost immediately priced by exchange rates and interest rates. Add to this the ability to purchase from many governments securities that are indexed to inflation, and it becomes highly unlikely investors will be caught off guard by anything less than sudden, catastrophic hyperinflation (defined as more than 50% per month) — and maybe even not then.

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  • Ted S.||

    I think you mean circumcise the Fed, Sheldon.

    Either that, or smother it in artisanal mayonnaise, or bake it like a deep dish pizza.

    I'd suggest divorcing the Fed, but we'd need a one-year waiting period for that.

  • ||

    Ha, you left out abortion, loser.

  • ||

    But since you were first, we'll give you bonus points.

  • Gozer the Gozerian||

    Deport the Fed?

  • SweatingGin||

    So long as we can wash it down with a nice cold glass of pop.

  • Fatty Bolger||

    Pop the fed.

  • Redmanfms||

    Is that like some shitty Mid-Western version of Coke?

  • Fatty Bolger||

    No, it's the midwestern version of soda.

  • ||

    Extremist!

    *points and makes gurgling throat noise*

  • VG Zaytsev||

    Contrary to folklore, the Fed is not needed to stabilize the economy or to prevent unemployment. As the Fed heads into its second century, we ought to realize that its record is terrible.

    Only if you believe the propaganda about the Fed's mission. It has been an fantastic success when judged on it's real mission which is to enable the growth of the central government.
  • R C Dean||

    To be fair, it has a dual mission:

    (1) Facilitate the Keynesian debt-financing/expansion of the government.

    (2) Underwrite (by, at the end of the day, socializing risk) the safety and profits of the banking sector and most especially its member banks.

  • VG Zaytsev||

    Yeah, #2 is an important secondary mission. I'd refine it to protecting the interests of large NY centered banks instead of the sector as a whole. When considered as such, the failure of thousands of small state banks in the 30s and fewer since, is not a policy failure at all.

  • Emmerson Biggins||

    + fuckin one

  • Fist of Etiquette||

    If I'm reading this article correctly, Richman is saying that we should replace the United States Federal Reserve with the United States Global Reserve, which has absolute discretion over all the Earth's currencies and interest rates. Or a single world currency backed by United States military might. Or maybe just the complete nationalization of banks.

  • 0x90||

    Pitch-perfect.

  • Scarecrow Repair||

    Lookee here: Inflation 1800-2005. I'd far rather have the steady prices before the Fed.

  • SweatingGin||

    GDP growth rate is a fun one, too. 4% before the Fed, 3% after.

    100 years of compounding 1% gains is a lot of growth lost.

  • ||

    Wasn't corporate income tax enacted around the same time?

  • Scarecrow Repair||

    Yes, same year I believe. They needed more money for the new imperial system, and I don't think it's coincidence that it enabled the US to afford to enter WW I.

  • ||

    I had an econ prof who thought that the corporate income tax causing corporations to try and hide their assets and pay their shareholders in higher stock value rather than dividends caused all sorts of problems such as companies buying up all sorts of small companies and running them in a less efficient manner, or companies that were undervalued on the market so that someone could come in, strip their assets and sell the company for the same price they bought it for, etc.

  • Number 2||

    That is tax law rather than fed policy, but the point is correct. Laws and taxes have consequences, and people adjust their behavior accordingly, often leading to unintended and unforeseen consequences that are worse than the "problem" the laws and taxes were intended to solve.

  • Emmerson Biggins||

    I do think that the dividend/cap gain tax rate differential causes a non trivial amount of dead weight loss, plus genreal skeeviness in the capital market.

    I think the top personal rate, the top corporate rate and the cap gain rate should all be equal. Dividends could then easily be deductable from corporate taxes with no weird distortians.

  • Number 2||

    The comeback to these arguments is the allegation that the United States averaged one major depression every 20 years between the abolition of the Second Bank of the United States and the Fed's acquisition in the 1940's of the ability to manipulate interest rates.

    So there you have it...inflation and lower average growth is supposedly the trade-off for avoiding major depressions. Except that while we recovered from these major depressions, inflation and lower average growth over the long run will be more harmful.

  • SweatingGin||

    IIRC, they were mainly panics, as well. A steep decline, with recovery starting in the next quarter generally.

  • Number 2||

    Mostly so, with exceptions like the so-called Long Depression of 1873-79. Interesting, in that case, like the Great Depression of the 1930's, our prolonged downturn was a component of a worldwide downturn that included protectionism and the shutting down of international trade. The latter point is significant because in the usual case, international trade is the means by which the economically "healthy" nation can help pull a nation out of recession by purchasing cheaper labor and products from the nation in recession.

    In such a worldwide downturn, manipulating domestic interest rates would have limited effect, Fed or no Fed.

  • ||

    I was trying to read this Timothy Egan book about the photographer Edward Curtis. But the guy is such a leftie and it just bleeds through everything he writes that I had to quit. The straw that broke the camel's back

    The money from the rail job dried up after one of the periodic panics that shut down the unregulated American economy. Broke, facing real hunger and no future, the Curtis family was left with no option but to look west.
  • Scarecrow Repair||

    I read up on the Panic of 1907 and it lead me down the rabbit hole that is wikipedia and the internet in general. I got the distinct impression that each Panic had its roots in government regulations meant to fix previous panics. 1907, for instance is I remember correctly, had its roots in the annual farming cycle shifting money back and forth from planting to harvest, the financial needs on the west coast after the San Francisco 1906 earthquake and fire, and Britain raising interest rates to borrow money to pay for its naval arms race with Germany.

    But the federal government had adopted regulations during and after the Civil War to raise money to pay for that adventure, and those regulations prevented banks from shifting money as it was needed. Among those was that banks were state chartered and it took too long to shift money through the federal system from one state to another.

    You start following panics backwards and it is amazing how the culprit was always federal regulations meant to fix the previous problems. Absolutely amazing.

  • Number 2||

    If you notice, Scarecrow, the Panic of 1907, like virtually all others, had its genesis in disturbances in specific markets -- what economists call "microeconomic."

    The Fed, like all modern economic theory, operates on the hubristic notion that a nation can avoid such panics by manipulating artificially-created statistical constructs such as "gross national product," "unemployment," and "inflation" (the latter being artificial in my view because of the arbitrary fashion in which nations create "official" measures that fail to reflect reality) thorough the manipulating the money supply and government spending.

    That this modern economic theory, like modern constitutional theory calling for courts to defer to the Will of the People as expressed through their Elected Representatives, happens to support larger, intrusive, Progressive government and the Regulatory State is, of course, purely coincidental.

  • Bill||

    Fed created 1913. Worst depression in history of US and world - 1929 - 19??

  • Number 2||

    But that was the Fed's "practice period," so it doesn't count. Get it?

  • Emmerson Biggins||

    2007-???? might give em all a run for their money

  • Rich||

    But without the Fed, who would set interest rates to guide the economy?

    1) God?

    2) But without Woodrow Wilson, who would set the Fed to guide the economy?

  • Eduard van Haalen||

    Earlier this morning, NPR found an example of welfare dependency harming the community: Govt-subsidized Talmud students in Israel.

    If welfare can harm right-wing religious students, maybe it might harm others as well?

  • Eduard van Haalen||

    Now they're interviewing an actress who plays a social worker in a halfway house for troubled kids. She researched her role by going to an actual institution!

    They couldn't find any actual social workers to interview?

  • Eduard van Haalen||

    Now a novel about poor Haitians.

  • Eduard van Haalen||

    Zombies!

  • SweatingGin||

    I used up most of my NPR hate yesterday morning, haven't recharged it yet with morning commuting.

    I don't get as hateful on fluff weekend stories -- it's the weekend. It's the midweek "No NSA spying news today, we have to feel sad for the guy who took out a mortgage and lost 100k on Beanie Babies"

  • Eduard van Haalen||

    The Israel story wasn't fluff, and I don't think the reporters regard the reviews as fluff, but as profound and significant social analysis.

  • Eduard van Haalen||

    Ooh, an upcoming story about a Medal of Honor winner - this time, it's not about soldiers getting damaged physically or mentally by the war.

  • Eduard van Haalen||

    "Tonight, the members of a left-handed lesbian poetry circle reflect on their recent visit to an indigenous community of Brazil."

    OK, that wasn't actually a real story. That I know of.

  • Scarecrow Repair||

    Might as well be. I lived in Berkeley and San Francisco long ago and had a subscription to KPFA on the principle that anything which upsets the government so much was worth supporting. But they had less and less that I wanted to listen to, and when they spent something like an hour every Wednesday evening on a lesbian prisoners poetry workshop, I had enough.

  • ||

    Ty Carter?

  • Number 2||

    OT: but on the Ars Technica website, at http://arstechnica.com/tech-po.....-to-govt/, there is an article about Obama's "outside panel" to review NSA privacy issues being made up of government insiders, including close Obama confidant Cass Sunstein. Included in this article is the following astounding quote:

    ""Dorothy Glancy, a professor at the Santa Clara University School of Law, told Ars that the selection “looks like a reasonably good working group,” although she lamented the lack of women in the group. The professor also noted that Cass Sunstein was a colleague of Barack Obama’s at the University of Chicago when he was a professor of law there.

    “Cass is particularly insightful about government organizations, administrative agencies, and their limitations,” Glancy added. “He is generally libertarian in his philosophical views—a good perspective to have on the panel. The word is that the president listens to Cass, who is known to be direct, frank, and unusually intelligent. Cass will likely contribute a great deal in terms of how to manage a large and famously non-transparent agency.”"

    If Sunstein is a libertarian, I am a pretzel. And it is scary that he actually passes for one in modern Academia. I shudder to think what they call Richard Epstein, Randy Barnett, and Eugene Volokh.

  • Ted S.||

    If Sunstein is a libertarian, I am a pretzel.

    All those nudges have contorted you into a pretzel shape.

  • Gozer the Gozerian||

    I have never understood why the libertarian focus is so often on ending the Fed, as opposed to replacing it with whatever system is preferred...

  • VG Zaytsev||

    The libertarian position is to replace it with nothing and allow emergent order to happen.

    Any government entity which replaced the FED would be as bad or worse, but different, in unexpected ways.

  • Gozer the Gozerian||

    This is an utterly insufficient answer -- much to my point -- as the current monetary system functions with a fiat base, and money has network effects...

  • ||

    That such a policy would have huge consequences for the global marketplace isn't an indication it is insufficient. After all, implementing the Federal Reserve system in the first place had huge consequences.

  • Gozer the Gozerian||

    That has nothing whatsoever to do with what I have asserted: Talk of "ending the Fed" is utterly insufficient without a strategy for doing so, which itself requires an understanding of the desired system (the destination).

    What will constitute the monetary base? How will the transition to the new base be effected? What regulations will be lifted? What new regulations, if any, will be implemented? What forms of private money creation will be permitted? Ask ten libertarians, and you are likely to get twelve answers!

    For what it is worth, I am a strident advocate of free banking, but I refuse to ignore the complications of transitioning to a different system.

  • Emmerson Biggins||

    A booth that exchanges gold for dollars or dollars for gold at a constang rate? Hell, throw in a 1/2 percent seinorage charge.

    Most statist quo fuckheads don't count that as a replacement. So we stopped talking about it.

  • The Late P Brooks||

    The Fed, like all modern economic theory, operates on the hubristic notion that a nation can avoid such panics by manipulating artificially-created statistical constructs such as "gross national product," "unemployment," and "inflation" (the latter being artificial in my view because of the arbitrary fashion in which nations create "official" measures that fail to reflect reality) thorough the manipulating the money supply and government spending.

    The simple fact that anybody can argue for increased debt-financed government spending as a "boost" to GDP without getting pelted with rotting cabbages means we are doomed.

  • The Late P Brooks||

    the selection “looks like a reasonably good working group,” although she lamented the lack of women in the group.

    Let's not let the truly important grievances escape our scrutiny.

  • The Late P Brooks||

    The libertarian position is to replace it with nothing and allow emergent order to happen.

    In other words, you want Goldman Sachs and Citibank to establish a dictatorial kkkorporatocracy.

  • Scarecrow Repair||

    Riiiight, because you'd prevent individuals themselves from prosecuting crimes.

    Occupy Wall Street identified the problem, fat cats raping the economy, but failed to realize that the government fat cats they want to rescue them are the same fat cats raping them.

    Cronies are just that, cronies, and any solution which involves cronies policing the other cronies is doomed to look like the crap we have today.

    The solution is not to decorate the fig leaf of government prosecution but to replace it with individual prosecution.

  • ||

    The solution is not to decorate the fig leaf of government prosecution but to replace it with individual prosecution.

    Yeah, lynch mob justice has customarily resulted in much better outcomes than courts of law.

  • OldMexican||

    Central banks like the Fed only messed money up, robbing the people while facilitating warfare and welfare spending through irresponsible large-scale government borrowing.


    Let's not lose sight of the importance of Legal Tender laws, without which the manipulations of the Fed would not have the effect it has today. Even accounting for custom and convenience, the fact that people are being compelled to trade in only one currency lends more power to the Federal Reserve as alternatives are shunned or prohibited by government.

  • ||

    This is why alternative currencies like Bitcoin are so interesting in the modern era.

  • setTHEline||

    "The Fed funds rate that Fed policy can influence through its monopoly over the quantity of money is inconsequential in shaping most short-term and long-term rates in capital markets, unless that moneymaking power subsequently promotes a pervasive price inflation."

    Fed policy necessarily promotes pervasive price inflation. That's the stated goal, albeit using some different catch phrases.

    The above is quote is a bit like saying that heart attacks are inconsequential, unless they affect the heart in some way. Heart attacks almost always affect the heart in some way, so why mention it?

  • R C Dean||

    Fed policy necessarily promotes pervasive price inflation. That's the stated goal, albeit using some different catch phrases.

    And as such, a violation of its statutory charter to maintain price stability. Inflation, however mild, is not price stability.

  • 0x90||

    And a slope cannot be referred to as being stable? You are not going to win that game, in the long run. The law is meaningless here -- the future belongs not to those who say which words are written, but to those who say what they mean.

  • ||

    And as such, a violation of its statutory charter to maintain price stability.

    But how can it be a violation of its charter when it is further mandated to maintain growth of money and credit "consistent with the economy's long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."?

    When you're tasked with doing 3 different things, all of which require entirely different strategies that are sometimes mutually exclusive, which do you prioritize?

    This is what you get when the government essentially says "do whatever it takes to make us look good!"

  • setTHEline||

    Yes, the charter is BS. I can't wait for Krugman to find out that fed policy is really a perverse form of trickle down. Take value from people who only have dollars (poor people), give it to banksters, have those banksters lend it to wealthy and middle class Americans cheaply (or buy assets to lift asset prices), and then have the wealthy and middle classes pay the wages of the poor people (minus everyone taking their cut in between). Mmmmmm makes you feel warm inside.

  • RannedPall||

    The hell is everyone bitching about? The economists have SPOKEN!!1!!!!1111!!!
    goo.gl/gZeejm

  • johnson29||

    We were able to get several buyers into new homes last year using these programs.

    http://www.reversemortgagelend.....age-rates/
    http://www.reversemortgagelend.....-and-cons/

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