Has anyone read this article on Cato? It claims that Greenspan actually ran a relatively tight ship with virtually zero growth of the monetary base during his time as head of the fed.
If this is true, surely we cannot still blaim this current crisis on an expansionary monetary policy. How does it sit with ABCT? Do we need to think again?
OUTRAGEOUS
I doubt it.
Does the ABCT depend on an arbitrary definition of the issuer of the currency?
To put it a different way, I am questioning whether “freezing the base” theoretically means anything if the banks still believe they will be bailed out.
It sounds like these CATO writers are just being pedantic. Their whole argument hinges on arbitrary definitions of who constitutes the issuer of money. They are saying “The Fed did not expand the monetary base.” which is only part of the story. They should complete the whole story by saying “The Fed authorized all of these other agents in the banking industry to expand the money supply too.”
I mean, we are just comparing:
a thief acting alone
a thief that tells other all of the other thieves “Live long and rob your neighbors! I will defend you when your theivery meets opposition! I will support your children and your grand-children if you die in your conquests!”
From the article, “his monetary policy was in fact tight, and his legacy is one of having overseen low and stable inflation and a striking dampening of the business cycle.”
In short, he gave us inflation, just not as much as other Fed chairs. I think that’s arguable, but let’s go with it as a premise. Any monetary inflation will cause the business cycle. Yes, I suppose lower inflation would mean less of a bubble, but different factors can characterize the bubble. The dot com bubble, for example, directed malinvested money in a different direction than the housing bubble.
One important consideration, though, is the Fed’s intervention in the interest rate. Since the Fed controls the interest rate, it’s impossible to know what the natural interest rate would be at any particular time–the free market process isn’t allowed to operate. Given the Fed’s tendency towards lower interest rates, we might reasonably assume that the natural interest rate is always something higher. This might not always be true, though, and even if it is, we can not know how much higher it should be.
Even if someone like Greenspan was trying to mimic a free market interest rate, they face the calculation problem–this is an insoluble problem as long as the market process is prevented from working.
Well, it should be noted that the CATO article claims it does not generally defend the central banking system and actually favours a system of free banking.
It should also be noted that the central bank doesn’t actually dictate rates of interest charged in the market. Only the federal funds rate. If it wants to drive down interest rates below the “natural” rate, it must do so through open market operations that introduce new base money into the system. If they did not do this, they can hardly be said to be pursuing an inflationist monetary policy.
Private banks were able to find ways around reserve requirements by moving away from holding reserves in currency. This, apparently cause the monetary inflation which the article points out, could not happen so easilly with a commodity backed currency.
im curious, what form of reserves did they hold , if not currency?
p.s. i wonder if you’ve noticed jeffery tuckers response to this thread on the blog
Extract from article:
ha! thats awesome, im sure i dont know what that is.
Paying with a credit card, I guess?
Looks like George Selgin has provided a more detailed rebuttle of of CATO’s article: