I’ve always known it, but I increasingly feel my – our – financial fates are in the hands of central bankers.
The sub-prime debacle is a classic case of Fed mismanagement.
First it pumped money into the economy after the dot-com bust to supposedly avoid a recession.
That extra money — and rock-bottom interest rates — distorts normal financial decision making: banks lend more to low-quality borrowers.
Now the Fed is slashing rates to avoid the impact of that sloppy lending, which its own actions encouraged.
As Greg Mankiw highlighted, Jon Stewart posed a great question to Alan Greenspan: “Why do we have a Fed? Why do we have someone adjusting the rates if we’re a free-market society?”
Greg Mankiw, one of the world’s leading economists, is honest enough to say his profession has no answer.
“We economists have rigorous and fundamental theory to explain why we have environmental regulation (externalities) and to explain why we have antitrust laws (market power), but there is no consensus about what market failure calls for the existence of a central bank,” Mankiw said.
How weird: one of the most powerful economic levers and we don’t know why on earth it should exist.
One problem is that a lot of economists know the Central Bank’s actions are mostly harmful; but they haven’t come up with a suitable alternative; or at least successfully sold an alternative.
The world’s greatest monetary economist, Milton Friedman, said: “…One unsolved economic problem of the day is how to get rid of the Federal Reserve…”
Friedman was dead right to argue Central Banks should be scrapped. But he failed to propose a good alternative: his money growth rules never really caught on.
At an intellectual level, Friedman’s desire to do away with Central Banks needs to be re-energised.
We delude ourselves that we live in a free-market economy.
What is free-market about a bunch of smug nerds setting interest rates and determining the course of a nation’s business?
I once hung out with some central bankers: they had weird rules like old-timers wore their ties well above their belly buttons; the young turks wore theirs hanging below their crotches.
Jon Stewart’s question was good, but he was asking the wrong person.
Alan Greenspan is probably the most over-rated person in the history of mankind. He’s an Ayn Rand acolyte but spent his life thinking he was smart enough to manipulate free markets.
It’s about time that people stood up and said: we don’t want our lives manipulated by a bunch of bureaucratic central bankers who know nothing about capitalism!