Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Don't Blame the Federal Reserve for Prescience of Financial Crisis

Politics / Central Banks Dec 15, 2009 - 03:28 AM GMT

By: Stephen_Mauzy

Politics

Best Financial Markets Analysis ArticleLong ago I quit criticizing the Federal Reserve chairman for failing to avert the latest systemic financial disaster, though I still pity him for enduring the endless Socratic essays, polemics, and indignant soliloquies of his detractors. Criticizing the Fed chairman for a lack of prescience is like criticizing a dog for an inability to recite the alphabet. When something is physiologically impossible, why bother?


But many people do bother, and they bother by retreading the same opposing laments: insufficient regulation or misguided regulation; too much liquidity or too little liquidity; too-low interest rates or too-high interest rates; excessively political or insufficiently political. No one can get Fed policy right, and no one does. Every five to seven years it's déjà vu, as an economic calamity erases vast swaths of financial wealth.

"Regulatory reform" is the first term to fire in the synapses of the nation's economists and op-ed scriveners whenever the Federal Reserve fails to fulfill its charter. The theme is the same and the writing is predictable — indignation draped in snarky prose importuning that regulation be reformed to the writer's specifications.

And yet with all this mental horsepower plowing the fecund fields of regulatory introspection, so little of it unearths the argument for eliminating financial regulation altogether.

Regulators — Federal Reserve or otherwise — are stasis-oriented, rear-view-mirror-focused bureaucrats charged with overseeing the forward-looking financial entrepreneurs. The entrepreneurs are smarter and nimbler. They easily capture the regulators and bend them to their will. This is a mismatch on a Washington Generals–Harlem Globetrotters scale.

Furthermore, government regulations dull the conscience. Regulation dictates that principles give way to rules: "Nothing in the regulations stated we shouldn't have written a hundred credit-default swaps on every triple-A-rated collateralized debt obligation, so we did nothing wrong."

But, the regulatory reformers say, the Federal Reserve is unique because money is unique. Money, unlike other goods and services, is a facilitator that requires oversight; therefore it must fall under the purview of a central bank. The argument is the culmination of 96 years of political inculcation. It has proven very persuasive, and very wrong.

In reality, money is as easily supplied by the free market as any other good. The bottom-up approach of private markets "regulating" goods and services is unquestionably superior to the top-down government approach, so why not apply the bottom-up approach to money?

"Money, in essence, is debt, with supply dictated by loan demand."

The monetarists argue that a top-down central bank guarantees monetary stability. Well, sure if your definition of stability is a grinding erosion of value through incessant inflation: today's dollar is worth $0.19 in 1971 dollars (the year the United States officially dropped any pretense of abiding by a gold standard) and worth only a nickel in 1913 dollars (the year the Federal Reserve was voted into existence).

If money and banking were removed from the purview of the Federal Reserve and placed under the purview of the free market, two key events would occur: First, we would see a return to commodity-based (most likely gold and silver) money, which would transform our butterfly-floating, unpredictable, though always depreciating, currency into a precise, stable measure of commodity weight. Second, money supply would no longer be a function of debt creation.

Banks operate under a fractional-reserve system that allows them to create liabilities and money virtually at will. This system expands money beyond what it would otherwise be and guarantees inflation by pushing the broad money supply far beyond the base money. Money, in essence, is debt, with supply dictated by loan demand.

A full-reserve scheme would prevent banks from lending phantom money. Banks' primary functions would be bifurcated into money warehousing and deposit lending. As warehouses, banks would collect fees for storing deposits, with the deposited funds always available to the depositor. As deposit lenders, banks would accept time deposits to lend. The depositor would earn interest for the use of his money, while the bank would earn the spread between the rate it paid to depositors and the rate it charged its borrowers.

Insufficient credit is the first and most voluble objection to a full-reserve banking system. This shortage may or may not occur. If it did, no problem — private finance companies would arise to fill the credit void. They wouldn't accept deposits, instead they would raise funds by issuing equity and debt. These companies would be free to specialize and lend to what their charters dictate.

A full-reserve system would facilitate credit flows while separating money from credit creation. Therefore it would inject safety and stability into the credit system. Banks would require less equity to cover the risks associated with matching assets and deposits. Depositors would no longer fear bank runs: banks would carry reserves to cover all demand withdrawals. Banking panics, banking crises, and taxpayer-funded banking bailouts would be relegated to historical footnotes. We would no longer need a lender of last resort.

What's more, a stable lending environment, a commodity-based money, and a full-reserve banking system would release a deluge of domestic capital and attract a flood of foreign capital. Creditors and equity investors would no longer need to game inflation's corrosiveness or predict where our butterfly-floating currency will land. Inflation premiums and currency risk would be stripped from the cost of capital.

Albert Einstein defined insanity as doing the same thing over and over again and expecting different results. It's at least a little insane to repeatedly expect the Federal Reserve to do what's impossible when the free market can do what's desired.

Stephen Mauzy is a CFA Charterholder, a financial writer, principal of S.P. Mauzy & Associates, and author of the forthcoming Prentice-Hall book The Wealth Portfolio. Send him mail. See Stephen Mauzy's article archives. Comment on the blog.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules