I recently was inspired by a SA article challenging supporters of the Fed's QE program to defend it. I promptly responded with a rebuttal article. From the numerous comments the articles generated, it occurred to me that the best way to address this issue was by turning the table on the Fed foes. I challenge all Fed foes to answer the following 10 questions. It is one thing to throw stones at a defenseless and silent Fed, it is a whole other issue defending your actions and beliefs. Preaching to the choir and surrounding yourself with like-minded people in a "End the Fed" group think commune is easy, defending your position in cross-examination is a whole other story. The readers of this article will be the jury, and decide if the "End the Fed" movement is guilty of extreme ignorance, naivety and economic malpractice, or do they have valid points and a system better than the existing Federal Reserve system?
Critics of the Fed, will you please rise and take the stand in defense of your position. You must speak the truth, the whole truth and nothing but the truth.
Question #1: If we are going to "End the Fed," what will we replace it with? Right now, our system is an "elastic" "fiat" currency with "floating" exchange rates. The opposite system would be an "inelastic" currency that has "intrinsic" value and requires "fixed" exchange rates. When answering this question, please identify your system as elastic or inelastic, fiat or "hard money" and whether or not it has fixed or flexible exchange rates.
Supporters of the Fed like myself believe that an elastic fiat currency with flexible exchange rates is necessary for success in a growing and dynamic global economy. Flexibility is essential, and rigid inflexibilities only create market distortions.
Question #2: Under the system that you design, what would prevent bank runs? Under the current system, the Fed acts as a lender of last resort and can "print money out of thin air" in order to ensure that there will always be enough currency on hand to meet all withdrawal demands. An elastic currency is essential for preventing bank runs. If you don't choose an elastic currency, how would you stop bank runs?
Question #3: How would your system have handled the crises of 1987 and 2008? Under our current system, the Fed rapidly increased liquidity to minimize the depth and severity of the crash.
Question #4: How would your system prevent depositors from loss? Under the current system, we have the FDIC as well as the Fed's discount window. How would your system guarantee bank deposits?
Question #5: How would your system make loans? Under the current fractional reserve system, interest is paid on deposits and charged on loans. Defaults are "eaten" by the bank, not the depositors. How would your system make loans?
Question #6: By "Ending the Fed," what impact would that have on the debt, unemployment, economic growth, spending by Congress and the US dollar's standing as the world's reserve currency?
Question #7: The Austrian Business Cycle Theory, or ABCT, is often used as justification for the anti-Fed attitudes of its followers. Ignoring the fact that the ABCT was inspired by the 19th century business cycle which occurred before the creation of the Federal Reserve and during the era of a gold standard, please explain how your system would address the concerns generated by the ABCT. If your system simply replicates the currency system of the 19th century, please explain why this time will be different?
Question #8: According to the ABCT, in order for an economy to bottom and start recovery, "malinvestment" must be purged from the system. Just how would your system effectively "purge" "malinvestment?" Just what kind of financial "leach" or "bloodletting" procedure is used in your system to cure the economy of its ills?
Question #9: Just what is the definition of inflation? How does your definition of inflation apply to interest rates and the financial markets? How is your definition of inflation discounted into bond rates?
Question #10: Under the current system, the Federal Reserve is a "quasi-private" entity removed from political influence. The Federal Reserve was created by an act of Congress. Additionally, Congress has given the Federal Reserve a "dual mandate" of full employment and low inflation/price stability. That "dual mandate" dictates the Fed's monetary policy. Under your system, how would your system alter the money supply? What mandates, if any, would be placed upon your system?
Once we get the answers to the above questions, we will get a better understanding of why people want to "End the Fed" and what kind of system they would replace it with. My bet is that once people actually think through this issue, they will discover the Federal Reserve is designed in a manner that will silence all its critics.
Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.