Let’s Get Rid of the Fed?

Stephen Williamson writes:

The Fed is trustworthy, in some sense, but I don’t think they will be able to withstand the pressure to do the wrong thing when the time comes to do the right thing.

Is this an argument against QE or an argument against the Fed? I think it is the latter and I think this is the source of disagreement among conservatives that Ramesh Ponnuru has been highlighting. (By the way, I have no idea whether Williamson should be considered a conservative — likely not. I am not even sure I should be considered a conservative — although I have been classified as such. However, we are both market-oriented guys, so let’s not quarrel about labels.)

The source of right-wing opposition to quantitative easing seems to have more to do with skepticism of the Fed than the potential effectiveness of policy. I am plenty skeptical of the Fed. David Beckworth and I are currently working on a project to examine nominal spending crashes in the last century. We find significant evidence that these are caused by monetary factors and suggest that had the Fed acted to stabilize the monetary base, these crashes could potentially have been avoided. In addition, I think that the Fed played a major role in creating the housing boom.

Nonetheless, I do not let my skepticism of the Fed dissuade me from what the right policy is in the current situation. If we need further monetary easing to stabilize nominal income, then that is the policy the Fed should undertake. In fact, my skepticism of the Fed is part of the reason that I advocate an explicit nominal income target that coincides with QE. That pre-commitment helps shape expectations and requires the Fed to follow through on its promise.

If one’s skepticism of the Fed trumps the proposed policy, isn’t this just an argument against the Fed? If one recognizes that further monetary easing is necessary and yet continues to argue against QE because they don’t trust the Fed, then it is time for a debate about whether or not the Fed should exist and, if so, in what capacity.

I am probably one of the only people on the planet who has an open mind toward competition in currency and other alternative monetary institutions while simultaneously advocating QE. I will not, however, let my skepticism of the Fed prevent me from advocating what I believe is the correct policy.

8 responses to “Let’s Get Rid of the Fed?

  1. “I am probably one of the only people on the planet who has an open mind toward competition in currency and other alternative monetary institutions while simultaneously advocating QE. I will not, however, let my skepticism of the Fed prevent me from advocating what I believe is the correct policy. ”

    You hurt my feelings. lol

  2. Well…

    Maybe not. My mind is pretty closed. Currency monopoly is a bad thing, but given the Fed’s monopoly on base money, quantitative easing is what they should do. Better late than never!

  3. Bill,

    You would be happy to know that I initially wrote, “I am the only person on the planet…” and then changed it to “one of the only people on the planet” as I realized that there are folks like you out there.

  4. “I am probably one of the only people on the planet who has an open mind toward competition in currency…”

    I think George Selgin at UGA is also one of these people. Also, my roommate from last year (an anarchist) pointed to Somalia as an example. When the dictator was overthrown several currencies were issued by a few large companies and pegged to the U.S. dollar. Not sure how that panned out, but even as a non-macro person I’m a little worried about the Fed’s discretionary actions in the last few years.

  5. in the same boat.

    the real question is what are your relative skepticisms of currency competition versus fed acting reasonably.

    most of us agree the fed saved things for the current crisis (a seperate but related question is whether they caused it in the first place)

    as for currency competition there is political skepticism (whether it will become a practical reality anywhere, even say in that great test-bed new zealand) and then operational skepticism of whether it will work, people will trust it etcetera even if implemented by some government.

    in some sense we have currency competition as some countries choose to use another’s currency, or merchants accept different currencies due to local currency deficiencies…

  6. “even if implemented by some government.” this is misleading, what i intended to say was “after some government implements currency competition, will people trust the currencies issued (by whoever)”

    but i guess if organisation A (say the fed or RBA) was going to issue currency based on the decision of its board, and organisation B, was just going to increase the money supply by 5% each year no matter what happens people might prefer the stated fixed increase expectations of currency B

  7. Let’s be real. This started out when goldsmiths started giving receipts (paper money) at 10 times what they had in gold deposits (and 10 times the profit). That’s how we got fractional reserve banking we have today. Then the Fed got installed under our noses when nobody was watching. Then it pushed through a law that owning gold was illegal, collected it all and went on to “notes” backed by nothing but our own confidence in it’s perceived value. I’m not the one to say how to do it, but it seems that having the Fed lending us our own money with interest at 10 times what’s on deposit with no control is a stupid way to do business, unless of course you own all the central banks! The Feds only interest is it’s profits which are incredible. It has no interest in the failure of any countries monetary system until it effects it’s own profits too much and has caused crashes when it sees fit. Dump the Fed, get back our gold and stop all the BS!

  8. Sorry, I misspoke above, it should say the Fed with interest and the banking system @ 10 times what’s deposited. But I’m sure the point was made.

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