The case against the Fed is a popular book issued by the Mises Institute. Murray Rothbard, who I criticised as being personally flawed with racism wrote this seminal book.
There is much to agree with in the book. Certainly there is a moral hazard with allowing any central bank to be a lender of last resort to banks drunk with risk. And we see that the Euro Central Bank does not want that role. Europe has seen the ravages of inflation first hand and the bank is reluctant to take on this role.
The book exposes the central banks as being essentially private, and the court case of Lewis Versus the United States 1982 certainly confirms that our courts believe that the Fed is private.
The problem I have with the book is that those in government are going to cheat with regard to money no matter if the Fed is in charge or if gold is in charge. Historically there are problems with the gold standard, as treasuries were drained due to imbalances of trade between nations. And the farmers involved in the populist movement complained that under the gold standard, the money supply was too tight!
With fiat money we understand that the money supply is often too loose, and inflation is chronic. Because of Rothbard’s thought, it is commonly known that the Fed causes inflation.
But I have a few issues with Rothbard’s economics. The standard of living was great after World War 2 as the expansion of credit made possible by Bretton Woods helped lift all boats. My issue with Rothbard is that credit expansion for business is in the legitimate interest of the government of the United States. What is not in the interest of the people is speculation.
After WW2, speculation was contained, and the middle class prospered. Banks made money lending in the real world, in a non speculative environment. People came to trust banks, and to even trust the Fed.
The real issue has been over the years, the ability of banks to stay “solvent”. Or should I say for banks to protect the assets of those who lend deposits to those banks. Banks are not solvent under fractional reserve banking if they had everyone redeem their money. But at least banks that held their loans and did not lend irresponsibly, made money and gained trust.
Had banks been content with small and steady returns, the Fed would not be subject to as much scrutiny today. Where the Fed got in trouble was in allowing the shadow banks to lend money in such a way as to drive up prices in housing. Banks didn’t hold onto their loans and pawned them off in securitization.
Some inflation was tolerated in the history of Europe, and money supplies were increased. However, my gripe with the Fed is not just about increasing the money supply but the addition of speculation into the mix. We already have an example of the post World War era where speculation was limited, and Americans prospered. The Fed was in existence then as well.
So, I think that the Fed should be nationalized. I think the debt the US government owes to the Fed could be wiped out. The Fed would have a third mandate to stop bubbles in real estate in their tracks. Speculation in food stuffs and in petroleum would also be severely limited.
Don’t get me wrong, I don’t trust the Fed’s partners, the IMF and the BIS and the World Bank, at all. These are international institutions. They seek more securitization and more risk. That must be stopped or we will have more housing bubbles. The middle class cannot tolerate more housing bubbles!
And it is interesting that while the Eurozone Central bank is opposed to all lending of last resort, our Fed was busy lending to the big Euro banks in 2008, as the lender of last resort and probably in 2011 as well. And the Fed mole, Tim Geithner gave taxpayer money, as Secretary of the Treasury to those banks who were going to be stiffed by AIG!
So, the question is whether the Fed, which is now outed, is going to behave or not. If this organisation does not want a revolution to abolish it, perhaps it needs to make sure it stops bubbles so that it doesn’t have to lend to Euro banks and our treasury doesn’t have to be raided by a former NY Fed president posing as Secretary of the Treasury! I don’t advocate violence but there are many that do. The Fed should clean up it’s act. As Fed President, Geithner was allowing Henry Paulson (Goldman Sachs) and others to spread disgustingly mispriced CDO’s to investors worldwide. He did nothing to stop it.
The Fed needs to get money into the hands of main street. Greenspan broke everything and now Bernanke is charged with fixing it. We will be watching.
As to the libertarian/Rothbard solutions, they have their dangers as well. I support the 30 year fixed mortgage. It would likely go away under Rothbard’s solutions. But our central bank, which had a good thing going with the 30 year, has ruined that mortgage and ruined trust by giving out easy money loans, undercutting the stability of the 30 year. And the libertarians have no desire to stop the easy money from flowing again. They want zero regulation!
For me it is a pox on both houses, the libertarian house and the Fed house. They both want to attack main street. Government is not strong enough to control the Fed. And it certainly won’t get any stronger under the libertarians. I don’t trust either of them. We need to see prosperity for the people.
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