Semantron 20 Summer 2020

Should we abolish the FED?

yet costly and arguably undemocratic, response to the 2008 Great Recession is, however, only one of historical examples which can be invoked against the case for a monopolist central bank (Zumbrun 2010). A controversial sub-section of the Republican Party, the Tea Party movement popularized by former Senator Ron Paul, goes as far as to argue that the FED's actions systematically undervalue the dollar, artificially interfere in the credit market through instruments of monetary policy such as open market operations, and in doing so exacerbate the booms and busts of the economic cycle. However, most respected monetary policy economists are in favour of independent central banks, the FED not being an exception. Over 99% of leading economists agree (79% strongly agree, 20% agree) that selecting candidates for FOMC membership based on their political views would lead to worse outcomes. They argue the FED provides five vital economic roles. The FED runs the payment and clearing systems, issues the dollar, acts as the lender of the last resort, regulates commercial banking, and administers monetary policy (White 2012). How would the current functions of the Federal Reserved be conducted if it were to be abolished? What are the risks and the possible benefits of such a system? Firstly, the inter-bank payments system can be administered privately via Clearing House; suchwas the case before the Federal Reserve Act. Even today, a large proportion of the payments system (over 50% of the U.S. banking market) is provided by the Clearing House Payments Company (White 2012). Such clearing house companies are also able to take on the regulation of the commercial banking sector through requiring their member banks to adhere to standards and examining the member banks ’ financial records. Clearing houses can further fulfil the lender of last resort role, as it is in the interest of the member banks and the clearing houses to ensure the liquidity of the financial system and to thus prevent liquidity traps, in effect providingmutual insurance (White 2012). The role of the lender of the last resort can also be taken by a consortium of well-connected and financially endowed decision- makers, such was the case in the panic of 1907. The stock market fell almost 50% from previous years peak over the three weeks when John P. Morgan and other individuals pledged to inject the necessary liquidity (Aliber and Kindleberger 2005) Secondly, just as Visa, American Express, and Citicorp today issue redeemable travellers' checks, ordinary banks would be able to issue private currency (White 2012). For instance, in Hong Kong, three banks issue currency privately. HSBS, SCB, and Bank of China are authorized by the Hong Kong Monetary Authority (HKM). The HKM promotes laws to create a more stable financial system. The HKM, however, acts as a monetary authority without the traditional roles the FED fulfils in the U.S. economy. Moreover, if private mints issued the coins, the supply of money could self-regulate and thus avoid the necessity of centralized monetary policy. A decentralized monetary policy could avoid most problems of centralized monetary policy such as, but not limited to (1) time lags (it takes almost two years for the effects of federal funds rate changes to be fully reflected in the economy); ( 2) the distortive impact on wealth distribution and market incentives as monetary policy interferes with and impacts bond markets globally; (3) distortions caused by unconventional money supply manipulations such as in large-scale asset purchases (quantitative easing). Further, such an injection of liquidity needs to be removed at a rate matching the recovery (assuming the recovery follows) to prevent heightened inflationary risk once the liquidity and normal economic conditions are restored.

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