Thursday, February 05, 2009

The End of the Fed?


The way Ron Paul tells it, his more than 30 years of speaking and writing about money, inflation, and the Federal Reserve System attracted only limited interest outside libertarian and constitutionalist circles. The subject, and Paul as its spokesman, were scarcely to be found in the media, even—or perhaps especially—on the business networks.

But Paul’s 2008 presidential bid changed that. Suddenly the Fed was on the table for discussion for the first time since Congress established it in 1913.

Paul isn't alone, and the list of those agreeing is formidable.

Peter Schiff, president of Euro Pacific Capital...Jim Rogers calls for the abolition of the Fed ...James Grant, editor of Grant’s Interest Rate Observer...

...John Hussman of Hussman Funds accused the Fed of going beyond its legal boundaries when it offered a $30 billion “non-recourse loan” to J.P. Morgan, which was secured by the worst of Bear Stearns’s mortgage debt. The Fed is supposed to provide liquidity to the banking system or shore up the solvency of a non-bank institution. This loan was neither. J.P. Morgan was in no financial trouble: it was “effectively offered a subsidy by the Fed at public expense.”

It's not only a matter of legality.

The Austrian view is that a central bank is not merely unnecessary but harmful. There is no need for a monopoly institution, by means of artificial money creation, to prevent the natural and healthy phenomenon of falling prices. There is likewise no need for a “lender of last resort” for the banking industry any more than for the personal computer industry or the shellfish industry.

Not to worry; I'm sure that the shellfish industry has a bailout proposal drafted...

At root is the concept of "fiat" money--that is, the Federal Reserve Note (look at that dollar bill you have in your pocket, folks.) What Paul and the Austrians prefer is the gold standard. If you're really old, you saw "silver certificate" instead of "Federal reserve note" on your dollar bills.)

Under a commodity standard, people could save for the future by accumulating gold and silver coins. The coins’ value appreciated over time because of their natural increase in purchasing power, as the relatively slow increase in the production of precious metals was outpaced by the much faster increase in the production of other goods and services. Today, only a fool would try to save for the future by piling up dollar bills.

Fiat money can make you, and it can break you:

Under fiat money, currency without commodity backing, the central bank can artificially lower interest rates by increasing the supply of money—and thus the funds banks have available to lend—through the banking system. This is supposed to stimulate the economy. What it actually does is mislead investors into embarking on investments that the artificially low rates seem to validate but that cannot be sustained under existing economic conditions. Unprofitable investments are made to seem profitable, and over time the result is the squandering of untold resources in lines of investment that should never have been begun.

Housing, anyone? How about used cars? Flat-screen TV's?

This will be fun to watch.

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