How to Reform the Federal Reserve

Earlier this summer the American Enterprise Institute hosted a forum.

Its consecrated purpose:

How to reform the Federal Reserve System.

A meeting of technicians rather than reformers, a sense of “inside baseball” hung about the entire business.

If  held in the open air, birds would fall stunned from the sky, it was so dull — to quote author Clive James.

Several proposals came under discussion.

One fellow proposed the monetary authority should “better articulate and communicate” monetary policy.

Another suggested the problem of “groupthink” be taken up.

Came another solemn proposal that the “floor operating system running the Fed” be addressed.

And should it not be?

What, you say the floor operating system running the Fed eludes your grasp?

Perhaps you require a refresher course in monetary policy.

Now… we freely concede that we take a dim view of most “reform.”

The reason is simple…

It is an ax that rarely strikes the root. And intentionally so.

It is designed to deliver a glancing blow… to leave the central target unmolested.

Not for nothing did H.L. Mencken label reform “mainly a conspiracy of prehensile charlatans to mulct the American taxpayer.”

Getting nearer to the root — no, splintering the root into so many shards…

The late libertarian Frank Chodorov said most reform aspires to “clean up the whorehouse,” while “keeping the business intact.”

For a more fitting analogy we seek in vain.

We file only this one caveat:

The whorehouse, for all its sin, at least does an honest trade.

A fellow vacates the premises somewhat lighter in the pocket — but often lighter in spirits to match.

He has gotten value for money.

Can the same be said for the Federal Reserve?

Its very business is false.

It manipulates interest rates that send false signals to markets.

And so it inflates bubble after bubble. The latest floats near 26,000 today.

The tech boom of that late ’90s was another Fed-inflated balloon.

It finally got a good hard pinprick in 2000.

The housing bubble, another Fed-induced wonder, got its own in 2007–08.

Returning to this summer’s forum on monetary “reform”…

The most critical reform was made conspicuous only by its absence…

That the Federal Reserve cease its manipulation of interest rates altogether.

That is, that it cease distorting the price of credit.

That is, that it cease distorting the price of capital.

That is, that it cease distorting the price of time itself.

No. The empaneled accepted the Fed’s manipulation of interest rates as a fact as elemental as gravity … or the rising and falling of the tides… or Donald Trump’s universal appeal to all Americans.

But since we have entered the spirit of reform, let us propose our own modest reform…

  1. Return the Fed to its original purpose of providing liquidity to otherwise solvent banks in case of financial crisis.
  1. Strike from the books its twin mandates of “price stability” and “full employment.”

Or… if it is real reform you seek, this we suggest in seven short words:

“The Federal Reserve Act is hereby repealed.”

This, incidentally, is within the lawful power of the Congress of the United States.

Reform the entire business off the earth.

No more setting, influencing or in any way monkeying short-term interest rates, long-term interest rates, intermediate interest rates or any other interest rates.

Let the market find its own level — high, low, all shades in between.

Turn the credit business over to borrowers and lenders on the free market — as the prices of chewing gum, floor mops and catcher’s mitts are turned over to the free market.

And let the devil take the hindmost.

Will there be losers?

Of course there will be losers — but does not the current arrangement yield its losers?

There will also be winners. And likely among them will be many of today’s losers.

Most importantly, it would likely wring the wild excesses from the financial system.

The booms would not thunder nearly as loudly — or for nearly as long.

Nor would the busts rattle the system at its foundations.

Thus, our simple proposal of reform, offered today in the highest spirit of public service.

It will be enacted once Hell hosts the Winter Olympics.


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning