Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Don't Blame the Federal Reserve for Prescience of Financial Crisis

Politics / Central Banks Dec 15, 2009 - 03:28 AM GMT

By: Stephen_Mauzy

Politics

Best Financial Markets Analysis ArticleLong ago I quit criticizing the Federal Reserve chairman for failing to avert the latest systemic financial disaster, though I still pity him for enduring the endless Socratic essays, polemics, and indignant soliloquies of his detractors. Criticizing the Fed chairman for a lack of prescience is like criticizing a dog for an inability to recite the alphabet. When something is physiologically impossible, why bother?


But many people do bother, and they bother by retreading the same opposing laments: insufficient regulation or misguided regulation; too much liquidity or too little liquidity; too-low interest rates or too-high interest rates; excessively political or insufficiently political. No one can get Fed policy right, and no one does. Every five to seven years it's déjà vu, as an economic calamity erases vast swaths of financial wealth.

"Regulatory reform" is the first term to fire in the synapses of the nation's economists and op-ed scriveners whenever the Federal Reserve fails to fulfill its charter. The theme is the same and the writing is predictable — indignation draped in snarky prose importuning that regulation be reformed to the writer's specifications.

And yet with all this mental horsepower plowing the fecund fields of regulatory introspection, so little of it unearths the argument for eliminating financial regulation altogether.

Regulators — Federal Reserve or otherwise — are stasis-oriented, rear-view-mirror-focused bureaucrats charged with overseeing the forward-looking financial entrepreneurs. The entrepreneurs are smarter and nimbler. They easily capture the regulators and bend them to their will. This is a mismatch on a Washington Generals–Harlem Globetrotters scale.

Furthermore, government regulations dull the conscience. Regulation dictates that principles give way to rules: "Nothing in the regulations stated we shouldn't have written a hundred credit-default swaps on every triple-A-rated collateralized debt obligation, so we did nothing wrong."

But, the regulatory reformers say, the Federal Reserve is unique because money is unique. Money, unlike other goods and services, is a facilitator that requires oversight; therefore it must fall under the purview of a central bank. The argument is the culmination of 96 years of political inculcation. It has proven very persuasive, and very wrong.

In reality, money is as easily supplied by the free market as any other good. The bottom-up approach of private markets "regulating" goods and services is unquestionably superior to the top-down government approach, so why not apply the bottom-up approach to money?

"Money, in essence, is debt, with supply dictated by loan demand."

The monetarists argue that a top-down central bank guarantees monetary stability. Well, sure if your definition of stability is a grinding erosion of value through incessant inflation: today's dollar is worth $0.19 in 1971 dollars (the year the United States officially dropped any pretense of abiding by a gold standard) and worth only a nickel in 1913 dollars (the year the Federal Reserve was voted into existence).

If money and banking were removed from the purview of the Federal Reserve and placed under the purview of the free market, two key events would occur: First, we would see a return to commodity-based (most likely gold and silver) money, which would transform our butterfly-floating, unpredictable, though always depreciating, currency into a precise, stable measure of commodity weight. Second, money supply would no longer be a function of debt creation.

Banks operate under a fractional-reserve system that allows them to create liabilities and money virtually at will. This system expands money beyond what it would otherwise be and guarantees inflation by pushing the broad money supply far beyond the base money. Money, in essence, is debt, with supply dictated by loan demand.

A full-reserve scheme would prevent banks from lending phantom money. Banks' primary functions would be bifurcated into money warehousing and deposit lending. As warehouses, banks would collect fees for storing deposits, with the deposited funds always available to the depositor. As deposit lenders, banks would accept time deposits to lend. The depositor would earn interest for the use of his money, while the bank would earn the spread between the rate it paid to depositors and the rate it charged its borrowers.

Insufficient credit is the first and most voluble objection to a full-reserve banking system. This shortage may or may not occur. If it did, no problem — private finance companies would arise to fill the credit void. They wouldn't accept deposits, instead they would raise funds by issuing equity and debt. These companies would be free to specialize and lend to what their charters dictate.

A full-reserve system would facilitate credit flows while separating money from credit creation. Therefore it would inject safety and stability into the credit system. Banks would require less equity to cover the risks associated with matching assets and deposits. Depositors would no longer fear bank runs: banks would carry reserves to cover all demand withdrawals. Banking panics, banking crises, and taxpayer-funded banking bailouts would be relegated to historical footnotes. We would no longer need a lender of last resort.

What's more, a stable lending environment, a commodity-based money, and a full-reserve banking system would release a deluge of domestic capital and attract a flood of foreign capital. Creditors and equity investors would no longer need to game inflation's corrosiveness or predict where our butterfly-floating currency will land. Inflation premiums and currency risk would be stripped from the cost of capital.

Albert Einstein defined insanity as doing the same thing over and over again and expecting different results. It's at least a little insane to repeatedly expect the Federal Reserve to do what's impossible when the free market can do what's desired.

Stephen Mauzy is a CFA Charterholder, a financial writer, principal of S.P. Mauzy & Associates, and author of the forthcoming Prentice-Hall book The Wealth Portfolio. Send him mail. See Stephen Mauzy's article archives. Comment on the blog.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules