There is an interesting interview with Frank Shostak over on the Ludwig von Mises Institute.
The US Federal Reserve discourages savings whilst at the same time encouraging mal-investment. Simple common sense would suggest that if interest rates of a mere 1.75 percent have not jolted the US economy out of its torpor, then 1.25 percent is not going to do it either. Interest rates are effectively at zero in Japan and that has produced little or nothing in terms of economic revival.
Yet again the state’s capacity to do harm far outweighs its capacity to do good. The problem is not so much the policies of the Federal reserve, but that there is such a thing as ‘The Federal Reserve’.
Alas so many people everywhere cannot seem to imagine the world continuing to spin on its axis without things like The Federal Reserve, The Department of ‘Education’, The Bundesbank, the BBC, The National Health Service, Income Tax etc. etc… they are just part of their fabric of reality. I have often found that any person who suggest they simply be abolished is treated as if they had suggested amputating a limb, rather than excising a tumour. The truth hurts and no one ever thanks you for hurting them.
Doing without central banks is a respectable idea among certain monoetary economists. Central banking is quite a recent idea.
Libertarians get quite cross with JK Galbraith because some of his writing seems statist or corporatist, but I urge everyone on this list to find a copy of his book ‘Money’ – his short history of banking. It has a lot in it to encourage local-currency and free-banking advocates.
Simplifying, he suggests that the modern cycle of boom and slump in the US dates from the imposition of ‘Hard Money’ in the 1870s, namely federally-controlled issue of bills, and that the creation of the Federal Reserve later was only a solution to a problem Federal overregulation had created in the first place.
Galbraith suggests that the 19th-century era of ‘Free Banking’, when anyone could set up a bank, take deposits and issue bills of deposit [otherwise known as dollar bills], was the most prosperous era in US history, and that market traders and wholesalers had little trouble discounting paper currency from dodgy banks and upvaluing paper currency from respectable, careful banks.
In other words, there was no Federal Reserve, no central bank, no centrally fixed interest rate, and bad banks crashed individually at the same time as other banks prospering – not all crashing together in sync as they have done during every nationwide downturn ever since.
One also has to worry that Mr Greenspan is getting close to what he well knows is “pushing on a piece of string” territory: the Reserve rate is the only tool he has and it is entering a region in which it no longer has any effect.
Americans’ worship of Greenspan is a religion in itself. It’s the same collectivism that gives rise to Gods, Dictators, and Democracy. The left often complains of corporations plundering the common man. They should turn their attention to central bankers. Central bankers don’t have to resort to extortion like taxmen do. They simply steal through inflation, and the common man is powerless.
The 19th century was not a time of Free Banking in the United States – even before the banking acts passed during the Civil War there were State level regulations – although (yes) there were less regulations (and less government backing) there is today.
Banking is a risky business (all business is risky) – if a bank keeps lending money to people who do not pay it back it will go bankrupt (and so it should).
Fractional Reserve Banking multiplies the risks of course – it is doubtfull if banks would go in for this (over the longer term) if it were not for government regulations and protections.
Of course (as a libertarian) I believe that OPEN fractional reserve banking (i.e. as long as people know what they are dealing with – no fraud) should be allowed. I also believe that people should be allowed to play Russian Roulette.
As for the Federal Reserve Board and its policy of print more money and we will all be rich – well Galbraith would love it. Other people should read the relevant sections of Ludwig Von Mises’ “Human Action”.
Paul Marks.
I agree – open fractional reserve banking would be my preference too.
I think I’ll live longer than state controlled central banking.
That being said, when it comes to central bankers, Greenspan is about as good as it gets. Read his gnomic speeches between the lines, he knows what he is trying to do and why.
I’d rather have him inside the system ameliorating its deficiencies than polemicising back at Greenspan Economic Associates.
He may or may not have misjudged the bubble, but who didn’t? (If you actually did, why ain’tcha a billionaire?)