Alex & Tyler at MR are discussing the Fed, but missing the point.
First, Long Term Capital Management. Should have been allowed to go bankrupt. A key gov’t job in a market system is to Enforce Contracts, including, under Rule of Law, creating a reasonable amount of justice when one side FAILS to fulfill their contractual obligations. Not having bankruptcy law available and usable for LTCM was a gov’t failure — not preparing one after the 1998 bailout is inexcusable.
I do believe that the USA financial system would have been better without a Fed (Alex is right!)– but even more firmly believe this cannot be proven, and that the political desire to have influence over an institution with the power of the Fed will dominate any Ron Paul ideal of a Free Banking world (Tyler’s conclusion is the 99.9% probable result for the next 20 years). Heck, we are unlikely to even take the baby step of allowing competing currencies.
Besides allowing war by the gov’t, the Fed also pretty much insures that the super-rich can stay that way, and socialize any Big Losses that their risky behavior creates, rather than lose it <i>en masse</i>.
Because the Fed is gov’t, it learns more slowly then the rich would learn w/o the Fed. If we, the people, are gonna be stuck with a Fed, we MR folk would be more productive to push for overall better monetary policy. But economists can’t even agree on what the definition of money is, much less the optimal policy.
CPI inflation measures aren’t considered clear facts about inflation, either, there is a not-well defined money to be controlled by the Fed to maintain a not fully defined inflation/ price level.
Even with a Fed, we need better bankruptcy laws to allow the Big Banks to go belly up. We need better rating agencies, perhaps to be expanded as more insurance, too, and if we can’t have Free Rating agencies, which we don’t have now, it’s silly to believe in Free Banking. (Even without reading the article in favor of it.)
An obvious PR problem is that the relaxation of prior banking restrictions, “freeing up the banks”, certainly did contribute to the current crisis. To actually de-regulate will require taking specific steps, but with respect to the Fed, I’m not reading here much in the way of “small steps toward a much better world”.
So Alex, Tyler, what policy changes do you actually recommend? Whether or not you believe the case for a Fed is weak, what laws should be changed now?