First, I am neither a monetarist nor Austrian, because I am not an economist. But I have been more influenced by Austrian economics than monetarism; my views on monetary economics are closer to Hayek than Friedman.
No, absolutely not. This is a wild stretch. The Federal Reserve doesn’t have real liabilities. Just because base money is not an asset does not necessarily mean that it’s really a liability. The FED is unlike all other banks; it does not operate under “similar principles” (which you readily acknowledge later in the thread).
I explicitly stated in the paragraph you quoted that ‘notes issued by the Fed are no longer liabilities.’ Once upon a time notes issued by the Fed were liabilities, because they were redeemable in gold. If the Fed issued too many notes, then the principle of adverse clearings would force a contraction. When the dollar became a fiat money, the Fed’s notes ceased being liabilities. But I think good monetary economics should treat Fed notes like liabilities. I also explicitly stated that ‘the Fed has been liberated from many of the ordinary constraints of banking’ , i.e. ‘the Fed is unlike all other banks’, but the Fed still operates along similar principles. The Fed could expand the money supply by purchasing bricks, apples, or cars, but instead its assets consist of various kinds of loans.
You mean open market operations are the means by which the federal reserve causes discoordination in the loanable funds market by arbitrarily altering the supply of money by decree. The Federal Reserve monopolizes the financial sector which eliminates all competition, therefore eliminating the mechanisms that prevent continuous monetary expansion.
I do not believe that mechanisms exist to prevent continuous monetary expansion, at least within a free market for money and banking. In any case, the very same monopoly power to discoordinate the loanable funds market is also the power to coordinate it. The Fed’s monopoly ensures that nobody else can satisfy changes in the supply and demand for base money, and so the Fed cannot refrain from intervention. What is the least bad monetary policy? That is the question we have to answer. I happen to think QE2 is an improvement, but not enough. You disagree, and I am sympathetic to such views.
Stabilizing nominal income streams seems to be of little importance when compared to realigning the capital structure. It’s important to stabilize expectations in order to prevent “secondary phenomena,” but the main priority is to eliminate malinvestment. Similarly, trying to come up with schemes that would increase the efficiency of a centrally planning authority is simply superfluous. There is no middle way; monetary and inter-temporal equilibrium are impossible conditions when we don’t have a competitive banking system.
I think stabilising nominal income expectations on a steady growth path (with zero inflation, on average) will provide the best macroeconomic conditions for ‘realigning the capital structure’. I advocate this as the least bad monetary environment for microeconomic coordination. In other words, I have Austrian concerns about the misallocation of resources, distortion of relative prices, and unsustainable capital structure in mind.
LOL, and how did you come up with this number? And what about the money multiplier? The FED could increase the supply of money if it stopped paying interest on reserves. It’s simply trying to keep the bond bubble going (which replaced the housing bubble); that’s all.
The money multiplier is very low at the moment, and I do not expect it to rise immediately. The channel through which QE2 will increase nominal income is not through fractional reserve credit expansion. However, eventually the multiplier will begin to pick up, and when that happens the Fed will need to be ready to contract.