On Abolishing the Fed and Replacing It with Nothing

Why not abolish the Fed and replace it with nothing . . .


Producing money has historically been a sovereign monopoly, but it’s not a public good. Barons, kings, and bishops outlawed private mints so they could gain monopoly profits on the seigniorage.  Is monopoly ever good? 


The U.S. and Britain went the opposite way, charging zero seigniorage so that private mints were unprofitable. But when gold and silver were discovered in the American west, the government was a bit slow to establish a branch mint. A private mint quickly sprang up in Denver, charging seigniorage a bit below the cost of shipping metal to Philadelphia and back.


The Fed doesn’t need to be ‘replaced’, not by the government anyway. The market will provide money, one way or another.


I know, we would have to do without all the brilliant policies that central bankers use to smooth out the trade cycle. But they aren’t working out so well, are they?


The U.S. had its first trade-cycle downturn in the 1820s, when the Second Bank of the United States was in operation.


Has our economy been generally less unstable with central banking than without?  I do not think so. 


The median voters ideas about what money is and how the monetary system works are so far from reality that they cannot be expected to oversee the system and in a democracy the  median voters rules.

I Found a Great Quote

Men do not make laws. They do but discover them.
-- Calvin Coolidge, 1914        

Calvin is often quoted which is interesting because he is known as being very taciturn. 

BP could offer $400/b for petro from the spill

I wonder, since it seems that BP chemically test to see if tar was from their leak, if they could offer say $400/barrel for petroleum from the spill to get people to be creative and do the cleanup, rather than having to contract with all those fishermen individually. 

More Bail Outs

More bail outs  as the EU announces a trillion euro bailout for the Piigs.

The excuse for all these bailout is that they cause feedback that will cause even more failure. 

So why do governments treat monopoly as bad in private business but make monopolys of their own and treat them as good.  I am referring to the government monopoly on currency/money which is in my mind at the root of the feedback problems in the financial system.  The feedback is what lead to the bailouts. 

We need to design a monetary system with a fail safe.  We need to design it because it cannot evolve because of the central bank's monopoly!  You cannot have natural selection without diversity!

Bryan Caplan blogs on the bailouts

Another blogger that thinks like I do on the subject. 

Comments on EconTalk Podcast on Finacial Fragility

EconTalk has a wonderful provocative podcast with Nasim Taleb author of "The Black Swan".

They discuss the the fragility of the financial system.  Here are my comments: 

I have this idea that the Federal Reserve and US treasury has a monopoly on money and so the system is fragile.  Also in a monopoly it is difficult to set price. 

I think that the monetary system is not robust because it did not evolve or at least its evolution was stopped when central banks were created.  From your (econtalk) Free Banking Pod Cats with George Selgin I got the idea that free banking was evolving toward a system where money was backed in nothing but assets of the bank.  The evidence is that they had gotten to the point where they held 30 capital but only 2 percent gold.  The money was backed in bank capital not gold to dump the gold backing all together would be only a crisis plus one innovation away.  IMO such a system would be robust. 

Having said all that I do not think that we could ever convince the median voter to allow free banking and allowing the monetary system to evolve so I am open to the post Keynesian idea that government should in a recession just spend money without selling bonds and tax the money back in response to inflation. 

Now on Nasim's ideas about nutrition and exercise I think that he should just say we do not know. 

We know we need some small amount of exercise (like walking), we know that we need a minimum of some vitamins, minerals and amino acids.  We know nothing beyond that! 

Interesting Study Shows that in the USA Latinos Outlive Whites.

Interesting this study shows that int the USA latinos, who of the groups studied have the least access to health care outlive whites.  Even more interestingly latinos in the USA out live most Europeans.

Add to that the fact that the eight Americas study shows that rural northern whites (with less access to health care) out live the general population and you begin to wonder if access to more health care shortens life!

Of course remember that homicide and accidental deaths move the life expectancy averages more than health care, beyond vaccinations, over the counter meds like aspirin/Tylenol and antibiotics.


Still a little shocking!

Hat tip to Bryan Caplan

Is Too Regulated to Fail a Good Policy Goal

Is too regulated to fail a good policy goal or is it impossible?  Isn't the failure of the weakest players in any industry a good thing? 

Knowing how Goldman Sachs, Lehman etc. operated I think that we would all be better off without their backward and corrupt ways of dealing but a bail out was passed with more Democrats than Republicans votes to bail them out! 

Economic freedom, though the greatest economic system by far does not shield us from economic ups and downs.  It certainly does not shield us from painful creative destruction, but the alternative is slow decline and under performance a la Cuba and North Korea. 

(BTW for those who insist that Sweden is the real relevant alternative rather than Cuba and North Korea, even the most active Governments in free economies have not been able to prevent all finical meltdowns, see Sweden's banking colapse in the early 1990s. it is only a complete governmnet take over like in Cuba and North Korea that can avoid booms and busts.)

IMHO free banking with money backed by bank assets (which was evolving in some places) would have given a fail safe to the financial system where one failing bank strengthens others.  The monopoly federal reserve system that we have now is plagued by feedback where the failure of one bank weakens the others. 

It seems the financial system is complex enough that no one knows enough to regulate it or to run the currency system on a monopoly basis.  The finical and banking systems should have been allowed to evolve longer before governments stepped in and created central banks.   Diversity gives strength and resilience.  A central bank is a monopoly entity.  It eliminates all diversity in currency issue.  This causes problems.  It is more difficult for monoplolies to set market clearing prices.  In a one currency system what do you value the currency against?  The CPI attempts to measure currency against a basket of goods but the CPI did not properly measure the rising cost of real-estate.  In a multi-currency system beanks must keep their currncy on par with other currencies and sop must make continual small adjustments. 

Diversity gives strength and resilience if one currency of many collapses the slack can be filled by others

Keep in mind that with all the regulations that have been added thus far the financial crises have gotten progressively worse.  That fact alone should give us pause. 

Worse than regulation are government guaranties.  Take the example of FDIC insurance, before the creation of the FDIC banks typically kept 30% capital (in banking capital = assets - liabilities) now banks keep 10% capital and they only keep that becuase it is mandated by law (regulation) but because it was law it is not a cushion because if capital drops below 10% the bank is declared regulatorily bankrupt!