What is the best system to replace the Fed?

[Arwon]

The Federal Reserve is a public-private partnership.

The 12 regional banks are legally private entities. The stockholders of said banks are the financial institutions which fall within the 12 regional banks' geographic area of operation. About one-third of the commercial banks in the US are shareholders in one of the regional banks. All nationally chartered banks hold stock in one of the Federal Reserve Banks and state chartered banks are encouraged to do so. The Presidents of the regional banks are elected by the member banks. The Boards of the regional banks are jointly chosen by stockholder banks (2/3rds) and by the Board of Governors in DC (1/3rd).

The Board of Governors in Washington is a Federal agency with its seven members being appointed by the President and confirmed by the Senate. The staff of the FOMC is mostly career professionals with, I presume, some research assistants and support staff handpicked by the seven members.

The Board of Governors and the Fed more generally are subject to Congressional oversight: four times per year the Fed chairman goes before Congress (twice to the House, twice to the Senate) and gives testimony on his actions and the conduct of monetary policy.

The FOMC itself is composed of the 7 Governors (who, again, are picked by the President subject to Senate approval) and a rotating group of 5 of the regional bank Presidents (who are elected by banks). So the "public" arm always has a majority of FOMC seats.

Interesting! That's an arse-backwards way to do central banking, but I guess historical legacies are different in different countries (The Swedish central bank certainly started as a private entity).

Why are the regional banks there, given there's a single currency? Just historical happenstance?

 

[Leoreth]

The idea that inflation promotes economic growth is utter nonsense, but not as much as the idea that you can have rapid deflation in a slow-growing economy with a slow-growing supply of currency.

[...]

Would you care to back up these assertions with facts?

I'm not here to give you an introduction to the basic principles of monetary politics.

Congress has no authority to establish a central bank. The powers granted to Congress are as follows:

[...]

Furthermore, if you read the Federalist Papers, they make it quite clear that a central bank is not a valid exercise of the Commerce Clause or the General Welfare Clause.

So you really hold the position that an 18th century document could've known what economic policies might be necessary in the 21th century? Really?

You make too many assumptions. If most of the countries in the world agreed to use grams of 10% gold, 90% iridium as a reserve currency, how would that necessitate world government? How would that require expanding the Fed to a global scale?

I suggest you read something about the demise of Bretton-Woods and then consider the "holy trinity" of monetary politics Integral mentioned.

The USA certainly has nowhere near enough gold to back all of its currency at spot prices. As for global gold reserves versus global supplies of all currencies, I have no idea.

I wasn't even asking about the gold in possession of governments. I talked about all the gold that has literally ever be mined.

Those same libertarians will also tell you that all of the virtues of private systems disappear when they get in bed with government.

Your argumentation is circular. Fed is bad because Congress has not enough control over its private member banks. But now it's bad because Congress is meddling with the private member banks?

Tangential point: those libertarians are idiots.

Inflation should always be expected for fiat currencies.

1) the Fed has never been wisely managed
2) all inflation is unnecessary

The above point is true, but that's not bad, because (2) is false. There's a manageable amount of inflation. The ECB for example targets 2% p.a. as a maximum inflation which doesn't even happen. Hyperinflation is not to be expected for fiat currencies unless the central bank is incredibly stupid or ill-informed (as was the German one during the post WW1 hyperinflation).

(1) The Fed runs your monetary politics for what now, 100 years? And, was the US dollar ever in serious danger of losing its value?

I'm not saying everything the Fed does is perfect beyond all doubts. But it's performing reasonably well, or else you'd be stuck in even worse problems after the GFC.

Really? So the extremely rapid economic growth that we experienced under a bimetallic standard during the Free Banking Era and Gilded Age was just a fairy tale made up by the authors of history books?

No, but that happened despite the absence of a central bank, not because. Factors that influenced the Gilded Age, for example:

- rebuilding efforts (see broken window fallacy to know what to make of that one)
- massive immigration
- revolutionary technological innovation

I guess you agree we don't want to rely on such favourable conditions to sustain economic stability?

You seem to be unaware of the fact that real median wages have been decreasing since 1970 or so, and allegedly "low" inflation bears some (if not most) of the blame for this.

It's not the Fed's fault that US employees weren't able to get their fair share of economic growth since 1970 or whatever.

Massive invention of federal powers by the scum in the Supreme Court. Do you have no shame?

And I stupid foreigner always thought the Supreme Court is there to decide what is accordance with the constitution ...

 

[BuckeyeJim]

So yes, the American attitudes towards it strike me as deeply strange and confusing.

You find it deeply strange that large groups of people are concerned about the potential disaster represented by a very, very, small group of people meddling or destroying their economy via various methods of economic manipulation? This is like saying we shouldn't have bitter attitudes towards bankers that are too big to fail, who wrecked the economy, got bailed out, and are now making more money than ever while millions of others continue to suffer for their inequity. But I mean, even the banks that were too big to fail had government oversight. But then again, there was no oversight when you really boil it all down because sound fed policy and bank oversight seems to have been passe in effort to manipulate the economy into growth. So it really seems to me that our entire economic backbone and financial industry is a complete and total mess that is full of corruption from the top down. What happens when we end up getting a Fed Reserve Chairman who's picked along complete and total political lines? And what happens when this guy is a complete dunderhead and prolongs or sends us into a deep recession with his monopoly money machine? What happens when the world gets sick and tired of us devaluing our currency and begins doing the exact same thing to boost their exports? I've read some pretty compelling reasons to place blame on the Fed Reserve for this current recession. Primarily for keeping interest rates artificially low. Who knows what else this small group of exceptionally elitist bankers and economists can ruin with this kind of unchecked power.

 

[Arwon]

Except it's not unchecked? I realise "it seems to me" is powerful analysis but "everybody is evil and corrupt and everything is a mess" is the sort of thing that needs substantiation.

 

[Leoreth]

Let's assume I agree with you the Fed's policy is wrong. Doesn't that only mean we have to correct that policy, instead of removing the entire institution?

It's as if you demand the abolishment of the office of POTUS just because you don't like one action of a president you don't like.

 

[Perfection]

This poll needs a downtown option.

 

[Integral]

Interesting! That's an arse-backwards way to do central banking, but I guess historical legacies are different in different countries (The Swedish central bank certainly started as a private entity).

Why are the regional banks there, given there's a single currency? Just historical happenstance?

Historical happenstance is a good way to put it.

In the early 1910s, when all of this was being hammered out, banks were afraid that a national Fed would impinge on local banking decisions, so the regulation of local banks is now handled through the regional Feds, an intermediary if you will.

National policy, particularly interest rates and the money supply, is of course administered by the FOMC in Washington.

The regional Feds are quasi-independent and have developed unique research cultures. The Federal Reserve Bank - Minneapolis has developed very close ties with the University of Minnesota. The FRB-St. Louis has a close working relationship with Washington University in St. Louis. The Presidents of those two regional banks are traditionally "inflation hawks" while the FRB-San Francisco tends to be dovish.

The major purpose, in my mind, of the regional Fed banks is as hubs of money-macro economic research. The twelve regional Feds each have research divisions, and combined they have about as many PhD-trained macroeconomic researchers as the top 50 US Economics departments combined.

 

[Cutlass]

The idea that inflation promotes economic growth is utter nonsense, but not as much as the idea that you can have rapid deflation in a slow-growing economy with a slow-growing supply of currency.

Money has to be loose enough to not stifle the economy. That means some inflation will happen. There will be more growth with low constant inflation then there will be without it.

1) the Fed has never been wisely managed
2) all inflation is unnecessary

Wrong and wronger.

Really? So the extremely rapid economic growth that we experienced under a bimetallic standard during the Free Banking Era and Gilded Age was just a fairy tale made up by the authors of history books?

It was all wiped out in the depression those policies caused.

Oh, you mean that hypothetical phenomenon that has never happened once in all of recorded history, and would stop almost immediately after it started once people realized that there was no more money left to hoard but they still had to pay rent and buy food?

So wipe people out and start over. Wonderful.

This is the fundamental reason why both inflation and deflation suck, and why an asset-backed currency is best: it experiences neither. Ten Carbombistani Dollars may be the price of a brick of ramen, or it may be enough to buy a Lamborghini. However, ten grams of iridium will always be roughly equal in value to a Roomba, or an hour and a half with a high-class escort.

Deflation sucks so vastly more that inflation is a small price to pay to prevent it.

You seem to be unaware of the fact that real median wages have been decreasing since 1970 or so, and allegedly "low" inflation bears some (if not most) of the blame for this.

Which has a lot to do with crippled labor and other factors, but not much to do with inflation.

 

[Lone Wolf]

I actually think that it'd be cool if Ron or Rand Paul becomes the American president and abolishes the Federal Reserve, and does other cool and intriguing things. It would be a marvellous social experiment.

 

[Cutlass]

Indeed do real debts increase during deflation, but again, an economy using the Gold-Standard would work very differently than today's economy, as people would avoid debts wherever possible.


I'm not saying it was great, but as you pointed in short, I said there was no better alternative. Once institutions such as a Central Bank were conceived, fiat-money would be able to keep most of it's value without having to lead to Zimbabwe style hyperinflation, and thus Metallic standards became obsolete.

There would be just as much debt under the gold standard. You have to look at the way people, companies, the economy as a whole, operate. To have a market economy capitalism is to have debt.

 

[Tahuti]

There would be just as much debt under the gold standard. You have to look at the way people, companies, the economy as a whole, operate. To have a market economy capitalism is to have debt.

Debt is indeed what keeps capitalism alive.

But it seems obvious to me that as real or nominal interest rates rise, people will simply borrow less. Thus, the ideal monetary system gives as much loanable capital as possible while maintaining low inflation (and deflation, for that matter).

I think we agree, we just use another angle to look at things.

 

[Leoreth]

You say "people would simply borrow less" quite nonchalantly, considering that this would be a huge problem! While one could argue about whether consumer debts are a good thing or not, businesses need to be able to access loans or else the capital investment cycle our economy is built upon falls apart.

The whole GFC was a good case study of what happens to the "real" economy when loans become suddenly unavailable.

 

[kochman]

Why can't the FED be controlled by Congress? Would that make matters worse?

Oh man...
Not sure which idea is worse... letting the people take over the Fed... or Congress...
The people, you guys who support that have too much faith in the "people"... sorry, but too many uninformed people vote for politicians... and that's way less complicated than economics.
Congress? Well, they could mess up a wet dream.

 

[JollyRoger]

Congress? Well, they could mess up a wet dream.

By Boehner walking in on you and Pelosi or Pelosi walking in on you and Boehner?

 

[BuckeyeJim]

Except it's not unchecked? I realise "it seems to me" is powerful analysis but "everybody is evil and corrupt and everything is a mess" is the sort of thing that needs substantiation.

What is the check and balance on the fed exactly? Congress can't even open the books to see what's going on in their! The irony of political independence is that it can lead to overt, unchecked, politicization.

 

[Cutlass]

Debt is indeed what keeps capitalism alive.

But it seems obvious to me that as real or nominal interest rates rise, people will simply borrow less. Thus, the ideal monetary system gives as much loanable capital as possible while maintaining low inflation (and deflation, for that matter).

I think we agree, we just use another angle to look at things.

Less debt means a slower growing economy. Businesses are dependent on debt for expansion.

 

[JollyRoger]

Less debt means a slower growing economy. Businesses are dependent on debt for expansion.

That explains the big spending of conservative politicians that want to run the government like a business.

 

[Tahuti]

You say "people would simply borrow less" quite nonchalantly, considering that this would be a huge problem! While one could argue about whether consumer debts are a good thing or not, businesses need to be able to access loans or else the capital investment cycle our economy is built upon falls apart.

The whole GFC was a good case study of what happens to the "real" economy when loans become suddenly unavailable.

That is true assuming we are going to the Gold standard from the status quo, which is not going to happen and for a good reason. Before fiat currencies could be properly managed (and were politically viable), metallic backing was the only good alternative, at the cost of higher real and nominal interest rates - as there was theoretically less to borrow from.
The deflation resulting from it, was a market reaction to the lack of credit and at the time, it wasn't as bad as it would be today because there was lot less indebtedness in the first place; people simply couldn't afford the interest rate.

 

[Cutlass]

That explains the big spending of conservative politicians that want to run the government like a business.

They want to run it like Enron. Not like a business that stays, you know, in business.

 

[Arwon]

What is the check and balance on the fed exactly? Congress can't even open the books to see what's going on in their! The irony of political independence is that it can lead to overt, unchecked, politicization.

I work at a statistical agency which is legislated to be independent of the government, to the point where it's actually illegal to show a lot of our raw data and our processing methods to outsiders due to privacy and confidentiality requirements. Your Census Bureau would have the same protections. Now, does the fact that elected party-political parliamentarians can't just wander in and check up on us mean that we should be assumed to be making stuff up?

If the Fed is anything like the Reserve Bank of Australia, they have to act according to a charter or bill which contains a series of goals to uphold (such as macro-economic stabiliy, an inflation target, or whatever). They do have an Act, they are responsible for meeting these goals and are regularly examined by Congress on those grounds. They, as a government agency, will also subject be to any other relevant legislation of a general nature (pretty sure there'll be a "don't commit freaking fraud" law there somewhere). Also, see Integral's earlier post about the public majority on the board. It's really pretty hard to maintain the fiction that this is an unaccountabile private fiefdom answerable to nobody except bankers.

Sure, you can assume every employee from the top-down is incompetent, evil or corrupt, but again, you're wandering well into non-specific government paranoia and conspiracy theory territory there. If there's fraud or malfeascence, don't you think that someone out of the thousands of employees would have, you know, blown the whistle?

I'd also throw in the fact that you have a national auditing office (the Government Accountability Office) which has published plenty of stuff on the FRB. In fact, even a cursory bit of examination shows that the Federal Banking Agency Audit Act specifically covers GAO access to the Federal Reserve and that questions of access are reviewed and negotiated as needed.

Governments are complicated, composed of many agencies with different remits and different oversight competencies, and accountability mechanisms extend well beyond the legislative arm. But I guess they're all evil and corrupt.