I always love a challenge. Thanks for the collegial criticism while keeping it respectful. Well done!
Your comment covers a huge expanse of history. So, it is difficult to comment on all of it. And certainly you bring up interesting points as there are always many facets to history. So, let me just take issue with a few of your points.
First, during the Laissez-Faire era, there were many issuers of currency - post offices, banks, general stores, etc. The competition acted as a check and balance on each other, as well as government spending. It was very hard for governments to do serious deficit spending back then. Yes, there were bank runs and and other difficulties, but various bank laws prohibited banks from diversifiying their deposit base and they were exposed to high concentrations of risk. If left to their own devices, banks could have better manged these risks. So, even during the Laissez-Faire era, banks were subject to many difficult regulations that impacted their liquidity during a crisis. Of course it wasn't perfect. It's a human system. Some banks were terrible and did foolish things. Nothing is perfect. But tell me, have we created perfection in banking today? We have had lots of crises since the creation of the Fed, only now, the system is in effect coordinated to ensure that errors in judgement are replicated throughout the system. Taken in combination, fiat money, low rates, bond buying, etc. is consolidating power for the Federal government at the expense of labor markets, private sector balance sheets and thrift.
Second, to call the Fed a "reactionary" institution is simply inaccurate. What's your starting point? Even if the Fed is reacting to something else as a "first cause," its reactions then become a first cause for something else. At what point in history do you begin your analysis? It is not possible to isolate first cause in the laboratory of the real economy. Moreover, the Fed itself is not only the executor of monetary policy, they are the primary regulator for much of the banking system. Their policies (as well as other government policies - i.e. Dodd-Frank) influence the volume of loans, quality of loans, allocation between loans and securities, etc. In recent years, as the Fed has held rates low, it has caused an explosion of capital in emerging market stocks and bonds, high yield bonds and a variety of lower credit quality instruments. Policy also influences how much banks purchase sovereign bonds. Back in the Laissez Faire/classical gold standard era, governments often had lower credit ratings than companies. Policy and government power have shifted the balance of power toward governments. Regarding the seasonal liquidity needs of the banking system in the 1800's and early 1900's, seasonality in banking was driven largely by the planting and harvesting cycle of a largely agrarian society. Do you seriously think society is largely agrarian today? My main point is not to suggest that any one system of finance is perfect. It's not. There are no utopias. Only trade-offs. But the trade-offs under which we live today are poorly understood. Governments act in their own interests and finance deficits in a variety of ways - partly by selling bonds, partly by getting the banking system to buy more bonds than they otherwise would and partly by purchasing bonds with new money on either primary or secondary markets. All of these activities have consequences for markets and do not stand in isolation. Central banks react to both policy and economy, but are not just reactionary. They are also first cause in a chain of events.
Hi Mike,
I always love a challenge. Thanks for the collegial criticism while keeping it respectful. Well done!
Your comment covers a huge expanse of history. So, it is difficult to comment on all of it. And certainly you bring up interesting points as there are always many facets to history. So, let me just take issue with a few of your points.
First, during the Laissez-Faire era, there were many issuers of currency - post offices, banks, general stores, etc. The competition acted as a check and balance on each other, as well as government spending. It was very hard for governments to do serious deficit spending back then. Yes, there were bank runs and and other difficulties, but various bank laws prohibited banks from diversifiying their deposit base and they were exposed to high concentrations of risk. If left to their own devices, banks could have better manged these risks. So, even during the Laissez-Faire era, banks were subject to many difficult regulations that impacted their liquidity during a crisis. Of course it wasn't perfect. It's a human system. Some banks were terrible and did foolish things. Nothing is perfect. But tell me, have we created perfection in banking today? We have had lots of crises since the creation of the Fed, only now, the system is in effect coordinated to ensure that errors in judgement are replicated throughout the system. Taken in combination, fiat money, low rates, bond buying, etc. is consolidating power for the Federal government at the expense of labor markets, private sector balance sheets and thrift.
Second, to call the Fed a "reactionary" institution is simply inaccurate. What's your starting point? Even if the Fed is reacting to something else as a "first cause," its reactions then become a first cause for something else. At what point in history do you begin your analysis? It is not possible to isolate first cause in the laboratory of the real economy. Moreover, the Fed itself is not only the executor of monetary policy, they are the primary regulator for much of the banking system. Their policies (as well as other government policies - i.e. Dodd-Frank) influence the volume of loans, quality of loans, allocation between loans and securities, etc. In recent years, as the Fed has held rates low, it has caused an explosion of capital in emerging market stocks and bonds, high yield bonds and a variety of lower credit quality instruments. Policy also influences how much banks purchase sovereign bonds. Back in the Laissez Faire/classical gold standard era, governments often had lower credit ratings than companies. Policy and government power have shifted the balance of power toward governments. Regarding the seasonal liquidity needs of the banking system in the 1800's and early 1900's, seasonality in banking was driven largely by the planting and harvesting cycle of a largely agrarian society. Do you seriously think society is largely agrarian today? My main point is not to suggest that any one system of finance is perfect. It's not. There are no utopias. Only trade-offs. But the trade-offs under which we live today are poorly understood. Governments act in their own interests and finance deficits in a variety of ways - partly by selling bonds, partly by getting the banking system to buy more bonds than they otherwise would and partly by purchasing bonds with new money on either primary or secondary markets. All of these activities have consequences for markets and do not stand in isolation. Central banks react to both policy and economy, but are not just reactionary. They are also first cause in a chain of events.