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Why The Fed Shouldn't (And Can't) 'Do Nothing'

Mar. 05, 2020 12:58 PM ETTBT, TLT, TMV, IEF, SHY, TBF, EDV, TMF, PST, TTT, ZROZ, VGLT, TLH, IEI, BIL, TYO, UBT, UST, DLBS, GOVI, DTYS, VGSH, SHV, VGIT, GOVT, SCHO, TBX, SCHR, GSY, TYD, DTYL, EGF, VUSTX, TYBS, DTUS, TUZ, DTUL, DFVL, TAPR, DFVS, TYNS, RISE-OLD, FIBR, GBIL, HYDD7 Comments
Alt-M profile picture
Alt-M
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Summary

  • One of the challenging things about my job here at Cato is that it calls for me, not only to make the case for monetary alternatives, but to comment on current Fed policies.
  • Saying that it's appropriate for the Fed to respond to coronavirus outbreak isn't the same as saying that it can prevent the outbreak from doing some serious damage to the world economy.
  • While we may not like the government-run fire department, so long as it's all we have, we should insist, not that it "do nothing," but that it try to replicate the preferred private-market outcome as well as it can.

One of the challenging things about my job here at Cato is that it calls for me, not only to make the case for monetary alternatives, but to comment on current Fed policies. Why is that such a challenge? Because, so far as many of my fellow free-market fans are concerned, saying that the Fed should do X rather than Y amounts to endorsing monetary central planning-a major free-market no-no. Their own preferred policy recommendation is simple: "End the Fed!"

Well, I'm not against ending the Fed, provided it can be done without raising havoc, and particularly without harming innocent people, including the many holders of U.S. dollar-denominated assets. But that's easier said than done. Having devoted a lot of thought to the problem, I've concluded that a revived, official gold standard can't possibly replicate the success of the 19th-century version, and that the best option is an "automatic," rule-based fiat dollar. My own particular ideal for such an automatic dollar resembles Milton Friedman's plan for replacing the FOMC with a computer, the chief difference being that my computer would be programmed to automatically achieve, not a stable growth rate for some monetary aggregate, but a stable level of nominal spending.

Whether such a reform would amount to "ending" the Fed is a question of semantics. Anyway, it would be good enough for me, if we ever managed to get there. But in the meantime, I don't favor a "do nothing" Fed. Moreover, I deny there's any such thing.

As I write this, for example, the Fed has just announced an immediate, emergency 50 bps rate cut in response to the coronavirus panic. I don't know if that response is ideal; but despite what many of my libertarian friends think, I'm certain it's better than no Fed response at all. Nor do I believe that a prudent

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Alt-M profile picture
100 Followers
Alt-M is a community devoted to exploring and promoting ideas for an alternative monetary future. Our goal is to reveal the shortcomings of today’s centralized, bureaucratic, and discretionary monetary arrangements, and to bring serious consideration of real alternatives to the center stage of current monetary and financial reform debates. Alt-M is a joint project of the Cato Institute's Center for Monetary and Financial Alternatives and the Liberty and Privacy Network’s Center for Financial Privacy and Human Rights.

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Comments (7)

Salmo trutta profile picture
At least you're more literate than Sumner.

Scott Sumner: "I think 2018 maybe was the exception, but basically, they've been under shooting on inflation"

That says it all. Economists are lunatics.

Martin Wolf in his book; “The Shifts and the Shocks” explained the root thus: “As the late Albert Hirschmann argued, “voice” – the ability to have a say in collective decisions that affect one – is just as important as "exit” – the ability of the individual to choose alternatives, not just as a consumer and producer, but as a citizen"

"Whereas the first concept of liberty is quintessentially English, the second goes back to the ancient world. For Athenians, the separated individual who took no place in public life was an idiotes – the word from which our word “idiot” is derived. Such a person was an inadequate human being because he (for the Greeks, it was always “he”) focused only on his private concerns rather than on those of his polis, or city state, the collective that succored him and to which he owed not just his loyalty, but also his energy."

As Dr. Philip George put it: when interest rates go up, savings flow into time deposits.

Case closed.
Salmo trutta profile picture
Link: "Alvin Hansen's Secular Stagnation Theory"

seekingalpha.com/...
The Nattering Naybob profile picture
@Salmo trutta Today we have too many deluded idiots which all lack agency. No voice, no real choice, livin the dream.

And that's why they call it one, because only an idiot would believe it. RIP - Carlin
Salmo trutta profile picture
Had several beers with George Calin when he visited KU. He's engaging.
Salmo trutta profile picture
#1 “It's therefore also meaningless for libertarians to say that the Fed should "let markets" set those rates”
#2 Finally, because "natural" or "neutral" interest rates (rates consistent with minimal Fed disruption of market-clearing price signals) can themselves change frequently, there's no reason to suppose that an unchanging Fed stance is generally better than a changing one.
#3 plan for replacing the FOMC with a computer, the chief difference being that my computer would be programmed to automatically achieve, not a stable growth rate for some monetary aggregate, but a stable level of nominal spending.

Try not to be ensnared. Talking a good game is deceptive propaganda.

A. Interest rate arbitrage will get you negative yields.
B. If a computer is used, you must have a model.
C. Targeting N-gDp caps real output and maximizes inflation.
D. The Fed didn’t change during the Great Depression (from 29 to 33)
E. The money stock can never be managed by any attempt to control the cost of credit
Curiosity Killed The Cat profile picture
The Fed will do what it always does – the only thing it can do, and that’s throwing money at the problem. Unfortunately, in this case, the problem is not money, the problem is the problem, and more money is not the solution.
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