I'm not quite sure I follow you when you say "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." If this is expressing the same sentiment as "During the financial crisis of 2008, correlations between asset classes went to 1.0, meaning that virtually all asset classes fell in tandem. Why?"... well I really doubt the answer is "because of the Fed." It really does have everything to do with a liquidity crisis, specifically one where every single financial institution held a bunch of paper they thought was AAA... but then everyone all of a sudden realized it wasn't AAA. So what happens when the entire system needed to raise capital at once to meet losses from instruments that, for all intensive purposes, were not supposed to lose money? They start selling everything to meet the "margin call" and stay afloat. Sure they were borrowing at X rate and lending at Y rate which were influenced by the Fed.... but I can't see how the Fed is to blame for things like Repo 105 or the originator's fraud that caused toxic assets to be perceived as AAA. It's like blaming the Fed for Enron.
With regards to the Fed's reactionary-ness.... I don't really take a starting point, but look more at the way the Fed thinks about itself and the economy. Keeping in mind their dual mandate (full employment and price stability) plus the "third mandate" of financial stability, the Fed usually doesn't act until there is material evidence of the mandates being violated or fulfilled. Of course the Fed is a cause and a reactor to economic conditions (reflexivity pops out as a relevant idea), but that doesn't change the mindset of conservatism that is present at the institution. In other words, their job is not to anticipate material changes in sentiment, data, markets, and overall economic conditions (although they must make forecasts), in the same way a speculator would. Think about what would happen to confidence and stability in the markets if you all of a sudden had a speculator-central bank that couldn't bat anywhere near .300. This is why we usually see the Fed lagging behind conditions: they don't tighten until there is inflation, they don't ease until a recession has been confirmed, they don't save banks until they are actually in trouble. The only examples of pre-emptive monetary policy I can think of are Volcker's rate hike and Bernanke's creative easing policies. But the typical lag simply happens by virtue of the board system at the Fed, like in all things with democracy and voting. Party X is looking forward, party Y is concerned about the present, and nothing happens until it needs to happen (hopefully). Democracy (or perhaps oligarchy), for lack of a better word, is slow but steady. A dictatorship would clearly be worse, marked by periods of benevolence and incompetence. And the alternative of economic anarchy... well I'm not quite sure what that would look like in today's day and age. But I do struggle to see how a lack of Fed would have prevented the tech bubble and the banking crisis.
Either way, I can agree with the sentiment that each system is imperfect and has its trade-offs. But I think that maintaining protection from a liquidity crisis is well worth the potential risk of asset bubbles, and the jury is still out on that. Perhaps this article will better explain my sentiments: http://fortune.com/2014/03/27/redeeming-greenspan-dont-blame-the-fed-fo…
Ron,
I'm not quite sure I follow you when you say "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." If this is expressing the same sentiment as "During the financial crisis of 2008, correlations between asset classes went to 1.0, meaning that virtually all asset classes fell in tandem. Why?"... well I really doubt the answer is "because of the Fed." It really does have everything to do with a liquidity crisis, specifically one where every single financial institution held a bunch of paper they thought was AAA... but then everyone all of a sudden realized it wasn't AAA. So what happens when the entire system needed to raise capital at once to meet losses from instruments that, for all intensive purposes, were not supposed to lose money? They start selling everything to meet the "margin call" and stay afloat. Sure they were borrowing at X rate and lending at Y rate which were influenced by the Fed.... but I can't see how the Fed is to blame for things like Repo 105 or the originator's fraud that caused toxic assets to be perceived as AAA. It's like blaming the Fed for Enron.
With regards to the Fed's reactionary-ness.... I don't really take a starting point, but look more at the way the Fed thinks about itself and the economy. Keeping in mind their dual mandate (full employment and price stability) plus the "third mandate" of financial stability, the Fed usually doesn't act until there is material evidence of the mandates being violated or fulfilled. Of course the Fed is a cause and a reactor to economic conditions (reflexivity pops out as a relevant idea), but that doesn't change the mindset of conservatism that is present at the institution. In other words, their job is not to anticipate material changes in sentiment, data, markets, and overall economic conditions (although they must make forecasts), in the same way a speculator would. Think about what would happen to confidence and stability in the markets if you all of a sudden had a speculator-central bank that couldn't bat anywhere near .300. This is why we usually see the Fed lagging behind conditions: they don't tighten until there is inflation, they don't ease until a recession has been confirmed, they don't save banks until they are actually in trouble. The only examples of pre-emptive monetary policy I can think of are Volcker's rate hike and Bernanke's creative easing policies. But the typical lag simply happens by virtue of the board system at the Fed, like in all things with democracy and voting. Party X is looking forward, party Y is concerned about the present, and nothing happens until it needs to happen (hopefully). Democracy (or perhaps oligarchy), for lack of a better word, is slow but steady. A dictatorship would clearly be worse, marked by periods of benevolence and incompetence. And the alternative of economic anarchy... well I'm not quite sure what that would look like in today's day and age. But I do struggle to see how a lack of Fed would have prevented the tech bubble and the banking crisis.
Either way, I can agree with the sentiment that each system is imperfect and has its trade-offs. But I think that maintaining protection from a liquidity crisis is well worth the potential risk of asset bubbles, and the jury is still out on that. Perhaps this article will better explain my sentiments: http://fortune.com/2014/03/27/redeeming-greenspan-dont-blame-the-fed-fo…