By: Les Dunaway
The subject of the Federal Reserve has generated a lot of smoke, but little light. In my opinion, the Federal Reserve must be changed, a LOT.
However, it performs required functions not related to the creation of imaginary wealth which has caused such suffering. Those who shout “Kill the Fed!” with no understanding of or consideration for those functions and their absolute necessity make the rest of us who share the belief that the Fed is a “clear and present danger” look like members of the tinfoil hat brigade. I resent that and I hope, somehow, all that energy can be channeled to solving the problem rather than just ranting.
There’s no question that change is needed. There is also no question that it will be a big, nasty job. It will take time – time to work out how and time to implement. In the meantime, there are immediate steps that can reduce the danger (below).
Part of the nastiness of the job comes from the need to, once and for all, drive a stake through the heart of Keynesianism. Read Milton Freidman’s Money Mischief: Episodes in Monetary History . If anyone wants to see Keynesianism in action take a look at Greece, Spain, Italy, … and read about how “austerity won’t work, we need to spend more to help growth” – how’s that working out?
There are two bills to start the process -Rep. Ken Brady’s “Sound Dollar Act” and Sen. Mike Lee’s “Federal Reserve Modernization Act (FRMA)”. Both start with what, in the opinion of leading economists, is the cause of much of havoc wrought by the Fed in recent times – the dual mandate. In 1977, Congress first gave the Federal Reserve a dual mandate to promote both “maximum employment” and “stable prices.” Chasing these two unaligned goals has often caused unemployment to increase. Other provisions would increase transparency. Ron Paul has been shouting “Audit the Fed!” for some time. He’s right! This is another part of transparency. Other, and more important changes, address the Fed’s “lender of last resort” role.
I’ve done a lot of reading and searching and I’ve found no concrete, step-by-step proposal replace the Federal Reserve. There’s lots of rants about how “evil” the Fed is, mostly by people without the first clue about how the financial system works. These writings have a common thread “The Fed has caused more problems than its solved”. Right! Government meddling in business always does.
We are seeing noises coming out of Washington that tax-code rewriting must happen. Good! We’ll need to watch carefully how that’s done. The Fed issue is, at least, as complex. We need a national leader who will stand up and say “It’s not working, let’s fix it!”. It will take someone with las bolas de latón to do so.
Our new President and the 113th Congress will have an opportunity to excel. They will have to deal with tax-code rewrite, entitlement reform and Federal Reserve reform/replacement. Oh and by the way, doing all that while Europe melts down and the Middle East is in flames.
As I’ve said before, we must be good parents to our elected officials – hug them when they do good and spank them when they don’t. And, like any good parent, watch them very closely.
More reading
Books
The Fatal Conceit: The Errors of Socialism (The Collected Works of F. A. Hayek)
Free to Choose: A Personal Statement
Money Mischief: Episodes in Monetary History
Papers
Board of Governors of the Federal Reserve System
HowStuffWorks “How the Fed Works”
What We Do – Federal Reserve Bank of New York
The Federal Reserve: Duties | Investopedia
FAQs: Fed Basics – Federal Reserve Education
The Federal Reserve Bank of San Francisco: Economic Research