What is the best system to replace the Fed?
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Integral
Can't you hear it?
The gold standard has *some* justification as the basis of an international monetary system.
There's an old concept in international macro known as the "impossible trinity": it's impossible to simultaneously have (1) independent national central banks, (2) stable exchange rates and (3) free international capital flows. Any two of those imply the negation of the third. If society decided that (2) and (3) were important at the expense of (1), as they did from 1945-1973, then a gold standard would be a good way to achieve those goals.
More recently, most developed countries have decided that (1) and (3) are important to the exclusion of (2), hence volatile exchange rates and independent banks in the form of the Fed, ECB, BoE, RBNZ, BoC, and BoJ.
There's an old concept in international macro known as the "impossible trinity": it's impossible to simultaneously have (1) independent national central banks, (2) stable exchange rates and (3) free international capital flows. Any two of those imply the negation of the third. If society decided that (2) and (3) were important at the expense of (1), as they did from 1945-1973, then a gold standard would be a good way to achieve those goals.
More recently, most developed countries have decided that (1) and (3) are important to the exclusion of (2), hence volatile exchange rates and independent banks in the form of the Fed, ECB, BoE, RBNZ, BoC, and BoJ.
Brian Shanahan
Permanoob
Much worse. There would be more inflation because Congress would run it for partisan advantage.
Replace the Fed with a Fed that targets nominal income.
Voted "a basket of goods". The basket I have in mind is Y, with price weights. So...target PY.
Why nominal income and not real income? Define Y?
Few people in this country would be worse for monetary policy than Ron Paul. If you want a capitalist economy, you can't have economic policy by a fraktard like Paul.
I don't agree with a policy rule. The reason is that I cannot imagine any conceivable rule that is flexible enough to deal with all situations. Remember that it is the chaos of the real economy that the Fed is created to deal with. How do you write a rule to deal with chaos? Remember that it is the rule that did not allow for an excuse to control the collapse of Lehman that did crippling injury to the rest of Wall St.
**
Bernanke is probably the best of all the choices to run the Fed at this point in time. But he has neither unlimited power, nor unlimited discretion. Also, Congress has been too conservative about handling their end of the crisis.
History_Buff
Deity
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Irrational fear of government.
civver_764
Deity
Take away personal incentive and people won't be trying to be louder than one another.
Integral
Can't you hear it?
To your first question: because Y is a real quantity while PY is a nominal quantity. The number of little green bits of paper in circulation does not affect real output in the long run (thought it does in the short run!); however, the level of PY does depend on the number of little green bits of paper in circulation even in the long run. Hence you target a nominal, not a real, quantity.Cutlass said:
The Federal Reserve can feasibly target any nominal quantity with more or less precision. If one accepts that the Fed can successfully target inflation, then it immediately follows that the Fed can successfully target the price level (after all, inflation is just the change in the price level). And if the Fed can control the price level within some reasonable degree of accuracy over some reasonable time horizon, then it can also target any weighted average of the price level. I propose not to use the CPI, which has weights determined by BLS, but to use PY, so that the weights are market quantities.
To your second: Y is the market value of all final goods and services produced in the United States over the course of a year, adjusted for inflation.
PY is actually easier to define: PY is the market value of all final goods and services produced in the United States over the course of a year. Nothing hard about that!
Nominal income targeting is just like inflation targeting, but has different weights. I'd argue that they are *better* weights. I can do so if you like.
So the ECB, BoE, BoC and RBNZ all have policy rules: their central banks are required to keep inflation within a certain band. The point of a policy rule is to make clear (1) what the central bank's goals are and (2) how the central bank aims to achieve those goals.
The Fed currently does neither. What are the Fed's goals, right now, in the second quarter of 2011? Do we know? I know what the BoE's goal is: it's 4% inflation over the next 24 months. I know the RBNZ's goal: 2% inflation over the next 12 months.
Note that the policy rule only informs us as to what the bank's goal is; it leaves open how the bank is to achieve that goal. That's where there is some discretion, enough to deal with the variability of the real economy.
Policy rules do not tell you what to do when big financial institutions collapse, but I think that's the job of the Fed's regulatory arm, not its monetary policy arm.
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In practice, you don't target nominal income today (because data are released with a lag, and there are some small lags between the implementation of policy and its effects) but instead target the forecast of nominal income 6-12 months ahead. Practically, "set the interest rate and manage expectations today so that given all information we have right now, the Bank expects to hit the nominal income target in one year."
The one big deficiency of targeting nominal income is that the data are released with less frequency than inflation numbers, so there are informational lags.
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If one buys in to inflation targeting, then it's just a hop, a skip and a jump to nominal income targeting. If one doesn't buy in to inflation targeting, the argument takes a bit longer.
mangxema
I
Before the currency was standardized, your average merchant would be confronted with so many different kinds of bank notes from places he probably had never even been to that the scene was ripe for counterfeiting. And perversely, sometimes he'd actually prefer the counterfeit note that he knew was fake because some legit banks were doing sketchy things and leveraging like crazy.
Rashiminos
Fool Prophet
I'm sure once the Fed becomes unviable, some small-scale distributed solutions will be found.
Perfection
The Great Head.
Everyone gets paid in cigarettes
Let's peg it to hit singles per year.
G-Max
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Our central bank is privately owned and operated, which is pretty much a big <Deleted> to the Constitution and the Founders.
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True. According to the US Code, Title 12, Chapter 3, subchapter XII, subsection 411, Federal Reserve Notes are to be issued exclusively for the purpose of making advances to Federal Reserve banks and for no other purpose (translation: they are not to be issued for general circulation as money)... they can, however, be "redeemed for lawful money" (translation: they are not lawful money) at the Treasury Department or at any Federal Reserve bank. So why do the words "legal tender" appear on them?
Opposition to inflation is never irrational.
The gold standard isn't a help with inflation. It just means that there will be a lot less economic growth and a lot more deflation.
In what sense? It was established by an Act of Congress from which it derives its authority, it's a independent institution of government, the head and top staff are chosen by Congress. Seems a pretty conventional central banking system to me.
Tahuti
Writing Deity
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It all depends on what you view as best: Deflation does, however, increase purchasing power. But I ultimately agree with you that deflation is bad because it increases real interest rates, thus arresting economic growth and leading to a slower increase of real purchasing power in the mid and long term.
Also, I doubt it is possible to fund a modern, large scale war while on the gold standard, should that ever be necessary. It's not a coincidence all belligerents of WWI went off the Gold standard, and did so again during Vietnam, although it has stayed that way ever since (because of the economic benefits you have pointed out).
It's only really conventional in that others were modeled after it. Not because the Fed model is conventional in its own right. One criticism of the Fed which is valid is its crazy structure. The regional Feds are privately owned and operated. And the members, not the government, choose who runs them. Only the central part of the Fed is really subject to government oversight. And they have mostly avoided that over the years. The rest of it is of the banks, by the banks, and for the banks.
Deflation doesn't increase purchasing power in effect. And that is because it causes massive economic dislocation and usually leads to economic depressions.
What's the main argument for the abolishment of the Fed, now?
Is it the typical "state rights" opposition to a central bank on federal level?
Or its current organization based on the "fiat money" principle?
Also, I don't think we could satisfy the Fed's critics by moving the entire organization up another intergovernmental level.
On a more general note against the "counterfeiting money" argument, you people seem to forget which role money plays in our economy, and that controlling liquidity is a central aspect of it.
And, as already mentioned, a wisely managed central bank doesn't cause unnecessary inflation. But a gold standard currency is guaranteed to lead to stagnation and deflation.
Is it the typical "state rights" opposition to a central bank on federal level?
Or its current organization based on the "fiat money" principle?
That would require a pretty powerful worldwide government first ... or else you get the mess that's currently going on in the Eurozone, only magnitudes worse.
Also, I don't think we could satisfy the Fed's critics by moving the entire organization up another intergovernmental level.
Also, is there even enough gold around to sustain sufficient reserves for every US dollar in circulation? Not even talking about all the other currencies who'd have to switch as well for the system to make any sense.
Curious. From what I've learned from discussions with internet libertarians, private is better than those incompetent and overblown government institutions ...
You apparently don't understand what "can be redeemed for lawful money" means, neither what the purpose of Federal Reserve Notes is.
On a more general note against the "counterfeiting money" argument, you people seem to forget which role money plays in our economy, and that controlling liquidity is a central aspect of it.
Except when there's no rational reason to expect inflation.
And, as already mentioned, a wisely managed central bank doesn't cause unnecessary inflation. But a gold standard currency is guaranteed to lead to stagnation and deflation.
ParkCungHee
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Wow. It's like you've never heard of hyperdeflation!
