Abolish the Fed

If you’re falling down a mountain, should you breathe through your mouth or your nose?  Should you hum an opera, a rock anthem, or a sea shanty?  Cross your fingers or your toes?

 

These questions make less sense than the question of what Federal Reserve Chairman Ben Bernanke should do about the economy– but the margin may be a slim one.

 

Many are clinging to a hope that rate cuts will be our rescue.  Larry Kudlow (CNBC and NRO) believes the Fed has created our current problems by being too tight:  “Credit blow ups, liquidity freezes, dysfunctional commercial paper markets, and suspect bank-loan quality do not exist– nor do they spill over into London and European money markets– when central bank policies are easy and accommodative”.

 

That’s like saying that you can never have a car wreck, as long as you can smoothly accelerate to the speed of light.  (Kudlow’s last item, that bank-loan quality could never be suspect as long as money is easy, is a clear non sequitur– subprime problems can only be created as a loose money phenomenon.)

The premise of arguments like Kudlow’s is that if we don’t have low interest rates (and a perpetual trickle of new money), liquidity could get stuck.  In trying times, some people might hoard cash.

 

The argument is arrogant in the extreme.  Why should a few people like Kudlow (or Bernanke), determine for all Americans that they’re “stuck” or “hoarding” if said Americans make spending decisions that these few consider irrational?  Kudlow in particular has been so wrong so often about so much, he’d need an entire month of his hour-long shows to apologize to all the bears he’s baited. 

 

As we move from their determination to make the spending and investment decisions of others, to their method of persuasion, we go from arrogance in its purified crystalline form, to falsely confident Kafkaesquian fog.  Saving is made into an unreasonable choice by controlled degradation of money in hand, as overseen by the Fed.  These aren’t free market capitalists– these are central planners who decry central planning, and market manipulators who bemoan the loss of free markets ideals.   They need therapy.

 

Could we ever really get stuck?  No.  A liquidity trap is just a difference of opinion.  People will come around when conditions come around.  And with the provision that there must be a limit to the reactive follies of politicians, conditions always come around.

 

You can’t eat money, nor for practical purposes can you knit it into a pair of pants.  “Hoarding” will be disgorged as people need or want things, whether it’s food and clothing, a new computer and a ticket to a Tom Hanks movie, or new factory equipment and an advertising campaign.  If for a time some people have a preference for security via savings, that’s their decision– why not respect it?  If you believe it’s the smartest decision in the world or the stupidest– whether you’re Larry Kudlow, Ben Bernanke, Barney Frank, or George Bush– you’re still just one individual making one individual’s educated guess. 

 

More input– more educated guesses– is better. The aggregate of countless individual decisions will always be better than the cleverest conceit of the central planner.  That’s why decisions about the utility of spending versus saving are best made by the individual person involved– the person closest to that one particular decision in that one particular place and time.  That’s true not just for the interest of the individual whose life and welfare is at stake, but also in terms of society’s and the economy’s interest.  Fed junkies like Larry Kudlow argue this passionately for everything else, but chicken out when it comes to banking and money.

 

The individual decisions admittedly won’t be perfect.  Wants, needs, desires and aspirations aren’t subject to perfection– they’re subject to subjectivity.

 

Which is better, macaroni salad, or colored pushpins?  Such a question could only be asked by a demented kung fu master in a bad martial arts movie (or well, I guess by me).  An economist can’t peer behind that veil of personal choices– you might as well ask what’s the correct thing to think when it’s cloudy on Tuesday (usually chocolate chip cookies and Scarlett Johansson).  There’s no right answer to economic questions at that level, and it’s a mistake to listen to only one class of people (who may happen to love macaroni salad and detest push pins).

 

We need to accept the economic input of each individual, humble or exalted, into the grand equation.  To try to trick them instead and take away some of their options, is really pretty disgusting– especially when you look now and see lives being ruined as the accumulation of tricks has finally crested and crashed.

 

Economist Murray Rothbard wrote in “The Case Against the Fed”, (which of course pre-dates today’s thorough central bank whip-sawing which he surely would have enjoyed), that the idea of the Fed as the great protector of the public and its money is a “fraudulent legend”. 

 

The Fed, conspiratorially or not, ends up as an instrument of misdirection, cover for inflationary action, and playing field tilting.  As Rothbard said:  it’s “the old ploy by the robber who starts shouting “Stop, thief!” and runs down the street pointing ahead at others.”

 

Rothbard thought that fractional reserve banking was a terrible wrong turn.  He didn’t buy arguments about economic stimulation, but beyond that felt that it was simply too unfair– great for governments and bankers– terrible for working class people trying to save.  He preferred a gold standard without fractional reserves, where each paper dollar would effectively be a receipt for warehouse gold.  (Or rather, that’s what he thought we’d get if government didn’t interfere and enable fractional reserve banking– Rothbard thought that the market should choose what’s used as money, whether that be gold, silver, other metals, silk underwear or golf balls.)

 

In Rothbard’s system, you could get credit– for it isn’t only created money that can be loaned– saved money can be loaned too. Maybe it won’t be quite as easy, but right now easy is the problem.  Meanwhile in such a world, productivity, creativity and intelligence would still expand economies– which is as close to a sure thing as you’re able to get.

 

Such purity of vision may be politically improbable.  But the situation we’re in now, where money supply sometimes expands at ten or fifteen percent, and there’s no real ceiling (or for the dollar, no real floor), should start to seem questionable as the damage done becomes clear.  

 

Over the short-term, maybe Kudlow does have a point about where we should go (though not how we got here).  Maybe there’s a tiny chance we can pop the balloon slowly if Bernanke’s helicopter drops just the right amount of money over just the right places. 

 

If you do fall off a mountain, even if it’s a couple of thousand feet, I suppose you might as well try to land on your feet.  In the long run though, you may want to stop falling off mountains. 

By Les Lafave

Banking Reform – themaestrosrep.org

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