The long history of central banking, and especially over the last 100 years of paper monies and out-of-control government deficit spending partly funded by “monetization” of the debt, has more than clearly demonstrated that the epoch of modern central banking needs to come to an end.
The president’s decisions to nominate Stephen Moore and Herman Cain leave a lot to be desired. But that is no excuse for perpetuating the myth that the Fed has been independent up until now.
There is growing support for the idea that meddling with market interest rates is a bad idea. Interest rates coordinate intertemporal production plans, and any attempt to alter them will entail undesirable unintended consequences.
Government expenditures can be funded by increasing reserves at the Federal Reserve. But limits on the demand for reserves mean inflation will follow.
The Fed has a monopoly on the creation of base money, the fundamental asset underlying the banking and financial system. And over decades, with each instance of financial turbulence, the Fed has become less constrained in how, when, and why it creates base money.
The Great Recession of the 2000s shaped a generation of macro- and monetary economists. We can debate the details. But three things warrant widespread agreement.
That one set of payments providers gets access to the core payments system while another is shut out seems quite arbitrary.
Interest rate manipulations by central banks through monetary policy are similar to price controls on other goods.
Wouldn’t the world fall apart? Not at all. I predict that the news would be front page for the usual 48-hour news cycle and then the world would move on. No big deal. There is no downside. And a huge upside. All it requires is some political courage.