The Federal Reserve — Statement of Principles
Now is a good time to summarize my general thoughts on the Federal Reserve System.
–A national currency (i.e., money supply) is both a legitimate public good and an enumerated power of the federal government.
–A gold standard is both impossible and undesirable. Fractional reserve banking is not an abomination.
–There is one and only one legitimate monetary policy: Changes in the money supply should reflect changes in real output, adjusted for changes in money velocity. (Note: That’s just a fancy way of saying: “No government-imposed general inflation or deflation.”)
–To the extent that the Federal Reserve performs or facilitates the function of maintaining our national currency and implementing the aforementioned monetary policy (i.e., by administering the fractional reserve framework underlying the money supply), it is not an affront to libertarianism.
–To the extent that the Fed deviates from that core function, it is an affront to libertarianism. Specifically:
–It is not the purpose of the Fed to prop up the stock market.–It is not the purpose of the Fed to prop up the subprime lending market specifically or the credit markets generally.
–It is not the purpose of the Fed to manipulate the dollar relative to other currencies.
–It is not the purpose of the Fed, or any part of government, to bail out anyone after their own financial recklessness, or to prevent or punish “predatory” lending (or “predatory” anything, for that matter).
–The Federal Reserve has the following controls over the financial system:
1. The discount rate should be adjusted to reflect, not to control, the rest of the yield curve.2. The reserve requirement can and should be adjusted only to reflect evolving financial systems (e.g., e-commerce).
3. Open market operations are only a proper function of government to the extent that they are used to implement a proper long-term monetary policy. Using short-term open-market operations (i.e., manipulating the federal funds rate) is not a legitimate function of the Fed under any circumstances (i.e., the fed funds rate should float freely).
Discuss.
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Related, if light-hearted, thoughts at LoSC, Hodak Value.
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This is a perfect summation. Everything is clear, and I like the gold standard denunciation. Americans who don't understand should be offered a crash course in the money multiplier, among other basic concepts.
My sister's house has been on the market for about 120 days…here's a priceless email from her clueless r.e. agent:
As I am sure you have been listening to the news predicting that because the market is weak, prices are going to continue to fall for another year or more. That has kept alot of buyer away. My loan officer said that many of the loans that the first time homebuyers use, i.e. no money down &95% loans are drying up and today he said that they have eliminated second trust loans. I know the Fed was meeting today and hopefully they can see the destruction that these higher rates are doing to our market and how it affects so many people.
Always bothered me during the run up in real estate—why is it good when housing "inflates" at 10-30%/year (adn accounts for 25% of my pay) but not good when milk goes up 5%/year (and accounts for < .1% of my pay)??? Nobody has ever answered that for me---
inflation = bad = inflation.
sign me up for the crash-course, Tony.