What is the best system to replace the Fed?

[Leoreth]

Afaik the Fed doesn't have properly laid out aims like a target inflation (recently I heard it was revolutionary for Bernanke to even hold a press conference that revealed nothing). This really is a point to be criticized, but again, it's nothing intrinsic to central banks as an institution.

 

[Cutlass]

The Fed has always been secretive. But the information is available, but only with a time lag. And, in the end, they still exist at the whim of Congress.

 

[BuckeyeJim]

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.

So we can't play by the rules of, "it seems," but we can play by the rules of, "if one countries centralized national financial institution is like this, then the other will be like..." This doesn't just fall into the realm of making stuff up. It extends far beyond that. I don't know how comfortable I feel with the government establishing targeted inflation rates or determining what macro-economic stability is. I'm less trustful that their methods will even produce long term macro-economic stability! I mean, look at the housing crisis. Also, look at the the financial crisis. There was a huge amount of malfeasance taking place within the whole financial system. Not only were there no whistle blowers, but the government agencies that were supposed to be regulating these matters were asleep at the wheel and made it possible for even MORE malfeasance to take place. This is about not trusting people right? Well these are measured reasons why people distrust the fed and its cloak of secrecy.

I don't know what to tell you about your link, other than that any inquiries that go regarding the fed are extremely limited in scope.

Also, this base argument that I'm accusing all governments or government officials of being corrupt is silly. I work for the federal government and I fully know that there are many great people that work within it. That's not the concern. The concern is more or less bad policy objectives, like keeping interest rates too low, or flooding the currency with quantitative easing and not achieving its goals before real inflation takes hold. Borrowing, and borrowing, and borrowing, without being able to repay it in the future. Things like that.

 

[Theige]

Afaik the Fed doesn't have properly laid out aims like a target inflation (recently I heard it was revolutionary for Bernanke to even hold a press conference that revealed nothing). This really is a point to be criticized, but again, it's nothing intrinsic to central banks as an institution.

The Fed does have a target for inflation.

 

[BuckeyeJim]

The Fed does have a target for inflation.

Who cares if they have a targeted inflation rate if there is never a gaurantee that it can be maintained or is positive for society in the first place?

 

[El_Machinae]

Can't the libertarians and pseudo-libertarians trade gold notes amongst themselves? If it's a really great system, wouldn't it catch on?

 

[BuckeyeJim]

Can't the libertarians and pseudo-libertarians trade gold notes amongst themselves? If it's a really great system, wouldn't it catch on?

What would gold notes solve? We go from printing more money to coining more gold!

 

[Arwon]

Buckeye: Yeah see all that stuff has much more to do with the specific rules and regulatory systems set up by the government, not intrinsic issues with the existence or nature of an independent central bank.

 

[Integral]

The Fed does have a target for inflation.

Sort of. Implicitly. But not explicitly.

I can go to the RBNZ or BoE or Risbank websites and learn about their inflation targets. Not so for the Fed.

 

[Cutlass]

So we can't play by the rules of, "it seems," but we can play by the rules of, "if one countries centralized national financial institution is like this, then the other will be like..." This doesn't just fall into the realm of making stuff up. It extends far beyond that. I don't know how comfortable I feel with the government establishing targeted inflation rates or determining what macro-economic stability is. I'm less trustful that their methods will even produce long term macro-economic stability! I mean, look at the housing crisis. Also, look at the the financial crisis. There was a huge amount of malfeasance taking place within the whole financial system. Not only were there no whistle blowers, but the government agencies that were supposed to be regulating these matters were asleep at the wheel and made it possible for even MORE malfeasance to take place. This is about not trusting people right? Well these are measured reasons why people distrust the fed and its cloak of secrecy.

I don't know what to tell you about your link, other than that any inquiries that go regarding the fed are extremely limited in scope.

Also, this base argument that I'm accusing all governments or government officials of being corrupt is silly. I work for the federal government and I fully know that there are many great people that work within it. That's not the concern. The concern is more or less bad policy objectives, like keeping interest rates too low, or flooding the currency with quantitative easing and not achieving its goals before real inflation takes hold. Borrowing, and borrowing, and borrowing, without being able to repay it in the future. Things like that.

That's what happens when you appoint libertarians to run things.

 

[Arwon]

That too.

 

[lovett]

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.

Could you explain how this would work?

It seems to me that it is quite easy to instantiate (2) and (3) without the gold standard. One simply has a central bank whose sole job is to fix the exchange rate. They can do this, quite simply, by having a policy of exchanging one unit of domestic currency for X units of foreign currency. If there is upwards pressure on the exchange rate (due to fiscal expansion, say) arbitrage will occur. Because the real exchange rate will be higher then the nominal exchange rate, people will buy domestic currency from the central bank and sell it in exchange for foreign currency. That is to say, if the central bank sells $2 for ever £1 but the real exchange rate is $3 for every £1 people will buy from the central bank and sell at a $1 dollar profit in international markets. This, by increasing the supply of domestic currency (in this example, pounds) equilibrate the market at the point at which there is no profit to be made by arbitrage; the real exchange rate equals the fixed exchange rate. Of course, this happens instantaneously given the usual assumptions about markets (no transaction costs etc) which aren't particularly facile when considering currency markets.

It doesn't seem difficult to have such a system. What advantages does the gold standard have over it?

 

[Bill3000]

It doesn't seem difficult to have such a system. What advantages does the gold standard have over it?

Link to video.

 

[GoodGame]

Solar System mining >>> matter replication without Fusion power.

Pegging it to energy production and energy reserves in general (not specifically oil production/inventory) would probably be better than pegging it to the average precious good/element (e.g. gold, silver, conflict diamonds, etc...). Uranium would be included as energy production, of course. Human power would have to be factored into the equation as well.

How can you have an economy without some means of energy?


Why should stockpiles lumps of shiny yellow stuff really be that important? Hasn't it been tried and crashed in the past?

 

[BuckeyeJim]

That's what happens when you appoint libertarians to run things.

I'm no libertarian, but I'm pretty sure that libertarians aren't in the business of manipulating entire economies. That's the business of Democrats and Republicans. What's so much worse is that both parties have a long history of utilizing the fed in a manner that produces short term gains at the expense of long term horizons. They're willing to gamble the future of the entire economy by taking huge swings to fix today's problems. When you start talking about printing billions and billion of dollars, and start talking about how you've got this inflation thing under control, and just trust us with the wheels to the Cadillac n' it'll all be okay, people begin to become distrustful. Especially when there is minimal oversight.

You just wrote a post last night about Volcker purposefully wrecking the economy to get inflation under control in the late 70s and early 80s. Yet, we're supposed to warm up to these fed heads and just trust them. Blindly. There's just too much bad crap that can come about with this much power.

 

[Masada]

Appeal to authority = fail.

What is the constitution then?

You live in a former penal colony

He lives in the Australian Capital Territory. It was not a penal colony. It was never even a colony. It was established by an Act of Parliament in 1911... history fail?

independent country even though Her Royal Worship is your head of state.

Parliament is sovereign.

 

[Leoreth]

The Fed does have a target for inflation.

Sort of. Implicitly. But not explicitly.

I can go to the RBNZ or BoE or Risbank websites and learn about their inflation targets. Not so for the Fed.

This is what I meant to say. And I'm also of the opinion it would help the confidence in the Fed if everyone knew what it is trying to achieve.

Could you explain how this would work?

It seems to me that it is quite easy to instantiate (2) and (3) without the gold standard. One simply has a central bank whose sole job is to fix the exchange rate. They can do this, quite simply, by having a policy of exchanging one unit of domestic currency for X units of foreign currency. If there is upwards pressure on the exchange rate (due to fiscal expansion, say) arbitrage will occur. Because the real exchange rate will be higher then the nominal exchange rate, people will buy domestic currency from the central bank and sell it in exchange for foreign currency. That is to say, if the central bank sells $2 for ever £1 but the real exchange rate is $3 for every £1 people will buy from the central bank and sell at a $1 dollar profit in international markets. This, by increasing the supply of domestic currency (in this example, pounds) equilibrate the market at the point at which there is no profit to be made by arbitrage; the real exchange rate equals the fixed exchange rate. Of course, this happens instantaneously given the usual assumptions about markets (no transaction costs etc) which aren't particularly facile when considering currency markets.

It doesn't seem difficult to have such a system. What advantages does the gold standard have over it?

Nothing. All he was saying is that in your scenario, the central banks obviously aren't independent of one another.

I'm no libertarian, but I'm pretty sure that libertarians aren't in the business of manipulating entire economies. That's the business of Democrats and Republicans. What's so much worse is that both parties have a long history of utilizing the fed in a manner that produces short term gains at the expense of long term horizons.

Good for libertarians that they're somehow able to portray themselves as no part of the political system, right?

They're willing to gamble the future of the entire economy by taking huge swings to fix today's problems. When you start talking about printing billions and billion of dollars, and start talking about how you've got this inflation thing under control, and just trust us with the wheels to the Cadillac n' it'll all be okay, people begin to become distrustful. Especially when there is minimal oversight.

The printing of dollars was very much necessary. Expansive monetary policies were the only thing that kept the economy from complete collapse, and given the severity of the crisis, enabled us to get out of it with only as much as a black eye.

Finding the right time to get interest rates up again might be difficult, and maybe we're already past it, but that's really no reason to throw the whole practice out of the window.

You just wrote a post last night about Volcker purposefully wrecking the economy to get inflation under control in the late 70s and early 80s. Yet, we're supposed to warm up to these fed heads and just trust them. Blindly. There's just too much bad crap that can come about with this much power.

You're not supposed to trust them blindly. But you're also not supposed to distrust them blindly.

 

[Cutlass]

Solar System mining >>> matter replication without Fusion power.

Pegging it to energy production and energy reserves in general (not specifically oil production/inventory) would probably be better than pegging it to the average precious good/element (e.g. gold, silver, conflict diamonds, etc...). Uranium would be included as energy production, of course. Human power would have to be factored into the equation as well.

How can you have an economy without some means of energy?


Why should stockpiles lumps of shiny yellow stuff really be that important? Hasn't it been tried and crashed in the past?

The issue is that the demand for money is in a near constant state of change. The supply of any commodity is not. So any possible commodity that you could pin the supply of money to would disrupt the economy. The goal is for money to be a medium of exchange and store of value and nothing else. Any commodity pegging would also make money a disruptive roadblock at times.

 

[Cutlass]

I'm no libertarian, but I'm pretty sure that libertarians aren't in the business of manipulating entire economies.

Yes, they very much are. They want to manipulate it for their own benefit. More to the point, the libertarian mindset has certain prejudices about how economies work. And that is what causes the problem. Greenspan is very much a libertarian. And that is the reason why he was so wrong. He believed things about the economy that simply were not true. And because of that he acted in ways that were horrendously dangerous.

That's the business of Democrats and Republicans. What's so much worse is that both parties have a long history of utilizing the fed in a manner that produces short term gains at the expense of long term horizons.

Not true. That's why the Fed is independent. The Fed has a long history of not doing what the government wants. That's why Reagan replaced Volker with Greenspan.

They're willing to gamble the future of the entire economy by taking huge swings to fix today's problems. When you start talking about printing billions and billion of dollars, and start talking about how you've got this inflation thing under control, and just trust us with the wheels to the Cadillac n' it'll all be okay, people begin to become distrustful. Especially when there is minimal oversight.

People are only mistrustful out of ignorance and the propaganda it spreads.

You just wrote a post last night about Volcker purposefully wrecking the economy to get inflation under control in the late 70s and early 80s. Yet, we're supposed to warm up to these fed heads and just trust them. Blindly. There's just too much bad crap that can come about with this much power.

Volker did not 'wreck the economy'. He engineered a recession to bring inflation under control. It wasn't pretty, but it was necessary. In the long run the inflation at that rate would have been worse.

 

[G-Max]

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

I'm guessing that it was to reduce the costs of transporting all that cash everywhere.

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

That's not what I asked for.

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?

The Constitution does not dictate economic policy. It does, however, specify which powers are given to the Federal government and which powers are reserved for the states.

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

You type so many words, and yet provide so little information...

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

That's stupid. How would you back a currency with the gold that is currently being used for tooth fillings, electronics, jewelry, etc.?

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?

Your argument is a strawman. I never said either of those things.

Tangential point: those libertarians are idiots.

Tangential point: you know nothing about libertarians.

The above point is true, but that's not bad, because (2) is false. There's a manageable amount of inflation.

"Manageable" and "necessary" are not the same thing.

(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?

YES!

The dollar has lost 98% of its value since 1913, and don't even get me started on the stagflation of the '70s...

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.

Giant Fat Cross?

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

This is actually true; it seems that our economy was trying to expand more quickly than the money supply was expanding, which explains the frequent "corrections".

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.

Correct. That was the fault of Congress for authorizing the printing of too many Federal Reserve Notes for gold to actually be worth $35/ozt, and the fault of Nixon for "fixing" this problem by abandoning the gold standard.

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

That's okay. Most Americans make the same mistake. In reality, the state governments were supposed to decide what was or wasn't in accordance with the Constitution. This is why they, rather than the ignorant masses, were given the power to elect Senators. Thomas Jefferson was one of the most outspoken opponents of the concept of judicial review, whereas most of its supporters were Federalists, including John "The Constitution is a worthless paper machine" Adams and Alexander "Screw this republic stuff, we should have a monarchy" Hamilton.

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?

The two are inextricable. The problems with the Fed are the inevitable result of its structure and the mixing of public and private power.

Money has to be loose enough to not stifle the economy.

True.

There will be more growth with low constant inflation then there will be without it.

That does not logically follow from the previous statement.

Wrong and wronger.

Would you like to back that up?

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

Those policies did not cause the Depression. The Depression was merely the bursting of the economic bubble that was caused by the Fed's artificially low interest rates during the '20s.

So wipe people out and start over. Wonderful.

Why must everyone misinterpret what I say? Any hyperdeflationary cycle in a free-market environment should correct itself before anything gets wiped out. It's like one of those new nuclear reactors that can't melt down because the coolant is also the neutron-slowing medium; if enough coolant boils off, the reaction stops.

Quoth the Wiki:

"historically not all episodes of deflation correspond with periods of poor economic growth"

"Whether deflationary spirals can actually occur is controversial"

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

Why are you ignoring the option of a currency that retains the same value over time?

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

Let's agree that it was caused by a lot of things, and inflation hasn't been helping.

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).

Hmm... it seems to me that in a healthy economy, banks would combat inflation by increasing the interest rates on the money that they loan out, and combat deflation by lowering the interest rates that they offer to their depositors. The total amount of borrowing would remain the same.

This really is a point to be criticized, but again, it's nothing intrinsic to central banks as an institution.

This thread is specifically about the Fed, not central banks in general.

in the end, they still exist at the whim of Congress.

Congress has the collective intelligence of a cage full of monkeys throwing poop at each other.

Can't the libertarians and pseudo-libertarians trade gold notes amongst themselves? If it's a really great system, wouldn't it catch on?

That's exactly what NORFED tried to do with Liberty Dollars before some Federal idiot decided that "private voluntary barter currency" meant the same thing as "legal tender", and got them shut down. Fortunately, Bud's Gun Shop caught on to the idea and started making "Gun Dollars", which are still available...

What would gold notes solve? We go from printing more money to coining more gold!

Please tell me that you're being sarcastic...

That's what happens when you appoint libertarians to run things.

How can you say something like that when we haven't had a libertarian administration since Grover Cleveland?

Why should stockpiles lumps of shiny yellow stuff really be that important?

1) Gold, unlike energy, is tangible. If the whole economy collapses, you still have your gold, and you can still trade it for stuff, but those "energy certificates" or whatever are only worth the paper they're printed on.

2) Gold cannot be "counterfeited" unless you have a nuclear reactor or cyclotron, and even then, it's more expensive than mining the stuff. Energy can be "counterfeited" by anyone who installs solar panels on their rooftops.

3) Gold cannot be destroyed unless you have a nuclear reactor or cyclotron, but paper "energy certificates" can be very easily destroyed by this super-advanced technology called "fire".

4) Similarly, gold is very difficult to convert into useless forms because of its chemical non-reactivity, and can always be converted back quite easily, whereas energy is constantly being irreversibly converted into useless forms (entropy).

5) Gold is SHINY. That's reason enough.

Hasn't it been tried and crashed in the past?

It has been tried, but it has never crashed.

What is the constitution then?

The supreme law of the land in the USA.

Perhaps you should learn what an appeal to authority actually is.

He lives in the Australian Capital Territory. It was not a penal colony. It was never even a colony. It was established by an Act of Parliament in 1911... history fail?

Parliament is sovereign.

Oh, so you're the piss-take police now?

Good for libertarians that they're somehow able to portray themselves as no part of the political system, right?

1) There's a huge difference between being "not in the business of manipulating entire economies" and being "no part of the political system".
2) Considering how few libertarians are actually holding public office right now, saying that they're "no part of the political system" is pretty close to the truth.

The issue is that the demand for money is in a near constant state of change.

Would you care to back this up?

Yes, they [libertarians] very much are. They want to manipulate it for their own benefit.

Somewhere on the Internet, someone has made an image macro saying "you fail everything forever". When I find it, I will present it to you.