Kevin :
Thoughtful critique. However, your assumption seems to be that laissez
faire is the
font of all economic good and if only we got rid of the Fed , then Utopia
would be around the corner.
Let me grant the worth of some of your arguments. Among other things the
Fed
has the severe limitation that just about all it can do is tinker with
monetary policy.
The result is the "hammer problem." When the only tool you have is a
hammer,
all problems look like nails.
Trouble is, our economy, like all advanced economies, is
multi-dimensional, a fact
that laissez faire theory doesn't really allow for. Smithians assume an
"innocent marketplace"
when pure competition not only can exist but necessarily will exist -as
long as the
big bad government keeps out of things.
This model has never been true and can never become true.
Too many special interests.
Too much unfair competition, the equivalent of a butcher with his thumb on
the scale.
Too many outside players -multinationals and foreign gvts- who could
care less
about our rules or priorities.
And much more.
One problem cannot be attributed to Smith himself, since he wrote a whole
book
about one of the issues you raised, moral hazards. Essentially he said that
unless
a society has a strong moral culture the economy will necessarily be
cutthroat,
unjust, avaricious, and you name it.
And no-one can possibly say that American culture as it currently exists
has a
strong moral foundation. If anything , it has an amoral foundation based on
unfettered greed, or at least obliviousness to the common good.
In other words, dismantling the Fed, I guess this is your underlying
objective,
simply would create a new set of problems.
There still would be capital flight, either to Delaware or the Caymans,
there still
would be shipment of jobs overseas, there still would be dangerous levels
of
technology transfer, and much else. Worse, there would be additional woes
to contemplate, we can be sure of that even if exactly what is currently
unclear.
After all, did the Fed create derivatives ? I don't think so, in fact the
major headaches
caused by derivatives blind-sided the Fed, at least according to Greenspan.
In a previous decade the big issue was the wild gambling behavior of hedge
funds,
also outside the purview of the Fed.
As well, the laissez faire values of the Bushies made sure that vital
regulations
were junked so that margins could go to hell, basically, with leverage
ratios
sometimes around 25 or 30, when 10 or so is the most that is prudent.
Then there is the anti-Fed, at least by way of metaphor, the international
financial
system which moves trillions of dollars around, almost by the hour, chasing
fractional gains to be multiplied millions of times over to yield billions
in
unearned profits. This destabilizes every nations' best efforts to create
sustainable economies for their populations.
Yet you seem to think such things can be ignored with impugnity.
As for "creative destruction," sure, Schumpeter is sometimes right, maybe
even often right. But ALWAYS right ? ? ?
Because of this False Absolute we now have a hollowed out economy with
a way too large section of our industrial base now in China, Korea, Japan,
and
elsewhere. And some industries are necessary for basic national security.
Let electronics vanish from the USA ? We have almost done exactly that
and no longer produce TV sets, CD players, and you name it, or only produce
a fraction of what we could manufacture, because it supposedly is good
to maximize profits at the expense of just about everything else. But this
isn't sound economic policy, it is social and political irresponsibility.
Let me assume that various of your complaints are valid. But it seems to me
that the solution is drastic ( radical ) redesign of the Fed, not junking
the Fed.
What needs to be junked is laissez faire theory -which is more of a joke
than
a serious theory of economics.
I'm reminded of an Anarchist ( of the peaceful variety , sort of
Tolstoy-ist in character )
who I once worked for in New Mexico. His ideal world was the Old West when
people were free to be "completely independent " of government and, in the
process, could flourish as never before --or since.
What self delusion.
Each inch of Western land was obtained by the government for them, was
protected
for them by the military, and was serviced for them in large part because
of
government policies, such as selectively selling public lands to RR
companies
so that Western farmers and miners and ranchers, etc, could have access
to markets.
Were all government policies for the good ? Of course not. But the solution
is government reform, and we got plenty of that in the Progressive Era,
under TR
especially, and later under FDR, and if things still were not optimal at
least
there were some changes for the better --with the possibility for
future generations to take the reform process further.
Billy
============================================
Hi all, new to the list, and already being opinionated. :)
The author doesn't do a very good job of presenting the arguments of the
"Fed bashers," so I thought I'd chime in. Those opposed to the Fed are
opposed for three major reasons:
1. Legality -- The Fed's position as a creator of fiat money that is
not under the authority of any branch of government and can't be fully
audited contradicts some language in the Constitution (art. I, § 8, cl. 5.;
art. I, § 9, cl. 6.). This is perhaps the weakest of the three arguments, as
all three branches of government violate the Constitution day in and day out
and no one seems to mind.
2. Morality -- The Fed is often said to be "waging a war against
inflation," when in fact the Fed is the only possible cause of monetary
inflation, as it controls the money supply. Inflation is precisely a sinister
form
of tax by which the Federal Reserve (by issuing credit and buying various
instruments with money that didn't previously exist) steals value from its
constituents' savings. The Fed thus discourages saving money, and
(especially through below-market interest rates) encourages spending.
Inflation is
an invisible tax without representation, as long as Congress is not allowed
any monetary power.
3. Economic merit -- The strongest argument of the three. The Federal
Reserve is the primary cause of the current recession, and by its very
nature causes asset bubbles. It does this in two primary ways. It sets
lower-than-market interest rates, which cause more borrowing to be done than
would
be done under a free-market system, causing malinvestment (as seen in the
dot-com and real estate bubbles). Secondly, it implicitly guarantees debt,
which creates moral hazard, allowing banks and other financial institutions
to make investments that would not be possible without this
guarantee--which again causes malinvestment and results in asset bubbles. The
author
actually praises the Fed for these flaws:
The Fed pumped out more than $1 trillion in new credit, created special
lending programs to support faltering segments of the credit markets
(commercial paper, money market funds) and rescued financial institutions,
notably
AIG, whose bankruptcy might have triggered a chain reaction of failures.
It's hard to imagine the kind of economic thinking that would see
trillions of dollars of inflation and call that a good thing. Not to mention
the
government subsidy (with taxpayer money, through inflation) of segments of
our economy that contributed to the malinvestment. In a healthy economy,
dying industries must be allowed to die so that others that don't yet exist
may be born (see horse-and-carriage argument).
Well, that turned into an essay. Sorry about that!
-Kevin
On Mon, Nov 30, 2009 at 10:52 AM, <[email protected]_ (mailto:[email protected])
> wrote:
WPost
Fed 'reform' we don't want
By Robert J. Samuelson
Monday, November 30, 2009
Ever since its creation in 1913, the Federal Reserve has grappled with a
daunting political contradiction. The Fed is charged with preventing the
collapse of the banking and financial system, whose health is essential for
the "real economy" of production and jobs. But financial bailouts usually
occur when mistakes or misdeeds by bankers and investment professionals make
them public pariahs. To do its job, then, the Fed protects -- or seems to
protect -- an unpopular, disgraced and undeserving group. We are now
witnessing this contradiction in full bloom.
The Fed has become a congressional scapegoat for assorted economic
frustrations: 10.2 percent _unemployment_ (http://www.washin
gtonpost.com/wp-dyn/content/article/2009/11/06/AR2009110600555.html) ;
expensive rescues of fragile
financial institutions (AIG, Bear Stearns, Citigroup); outsize Wall Street
bonuses; and the crisis itself. The denunciations transcend rhetorical
outbursts. The House Financial Services Committee recently _voted_
(http://pogoblog.typepad.com/pogo/2009/11/house-financial-services-committee-passes-paul
grayson-amendment-to-audit-the-fed.html) to require the Government
Accountability Office (GAO) to "audit" the Fed's monetary policy -- its
efforts to
influence interest rates and credit conditions. In the Senate, Christopher
Dodd, chairman of the Banking Committee, has _proposed_
(http://www.washingtonpost.com/wp-dyn/content/article/2009/11/09/AR2009110901935.html)
stripping the Fed of all powers to regulate financial institutions -- its
actions
to police lending and management practices. These powers would go to a new
agency.
The Fed backlash is bipartisan. Rep. Ron Paul, a Republican and
libertarian, proposed the GAO audit, which he sees as a first step toward
abolishing
the Fed ("End the Fed" is his latest book). Paul favors resurrecting the
gold standard and combining it with private money; Wal-Mart could issue
currency. His views are long-standing, principled -- and wholly impractical.
Dodd, of course, is a Democrat. Much Fed-bashing simply indulges Congress's
impulse to blame someone else for anything unpleasant.
Lost in this politically charged climate is the reality that the Fed, more
than any other government agency, arguably stopped last fall's financial
panic from becoming a global depression. The Fed pumped out more than $1
trillion in new credit, created special lending programs to support faltering
segments of the credit markets (commercial paper, money market funds) and
rescued financial institutions, notably AIG, whose bankruptcy might have
triggered a chain reaction of failures. These were seat-of-the-pants
responses, taken in the midst of crisis and pervasive uncertainty. We will
never
know what might have happened without them. The second-guessing is occurring
now when there's less fear and more information.
What's also overlooked is that the Fed isn't the super-secretive,
unaccountable agency of political stereotype. In 2009, Fed officials from
Chairman
Ben Bernanke on down have testified 32 times before congressional
committees. The Fed makes detailed disclosures about its policies. After every
meeting, the Federal Open Market Committee (FOMC), the key decision-making
body
on monetary policy, issues a statement explaining why it has -- or hasn't
-- changed its interest-rate target. Until 1994, there were no announcements
after FOMC meetings. Economists and investors had to guess.
Contrary to conventional wisdom, the Fed's activities are already widely
audited. Deloitte & Touche examines the Fed's financial statements, which
are published. The GAO can audit many Fed activities, including its banking
regulation and supervision of the payments system. What it's barred from
auditing is the conduct of monetary policy, including relations with foreign
central banks such as the European Central Bank.
Congress has so far sensibly put this off limits. "Audit" has a different
meaning in the context of the GAO than in everyday usage. It means examine,
investigate, evaluate and, often, criticize. It's not just crunching
numbers. The GAO usually undertakes studies at the request of someone in
Congress. This suggests that the GAO could be used to influence or intimidate
the
Fed through selective investigations, which would involve access to
internal Fed documents and interviews with policymakers. The Fed might be
pressured to finance government deficits or to adopt an "undue focus on the
short
term," Vice Chairman Donald Kohn _testified_
(http://www.federalreserve.gov/newsevents/testimony/kohn20090709a.htm) before
Congress on July 9.
Historically, similar pressures have caused other central banks to unleash
inflationary torrents of money, Kohn said.
This is not inevitable, but even the impression that the Fed's
"independence" is compromised could perversely undermine confidence in the
dollar,
leading to higher market interest rates or a rapid fall in the dollar's
foreign exchange value. Massive projected government budget deficits compound
the
psychological damage. Similar objections apply to Dodd's proposal to end
the Fed's power to examine and regulate financial institutions. If this
crisis teaches anything, it is that the Fed needs to know more -- not less --
about large financial institutions.
The Fed isn't infallible. Its mistakes contributed to the crisis. Its
present low-interest-rate policy poses dangers of fostering inflation or new
"asset bubbles." But the congressional Fed-bashing poses greater dangers.
Ironically, the destructive remedies being peddled are part of "financial
reform" legislation. If this is "reform," we're better off without it.
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