Should we abolish the FED?
Table 2: Board of Governors of the Federal Reserve System (U.S.), Effective Federal Funds Rate
Self-regulation could also set a market-determined interest rate. This rate would be formed by information dispersed in the credit market. In turn, the interest rate would reflect the current risk- preference of households, corporations, and the financial system. Therefore, market-set interest rates have the potential to stop the artificial exaggeration of bubbles and crashes arising due to discretionary monetary policy. Such argument holds regardless of whether the wrong discretionary policy is inflationary (such as the FEDs before the 2008 crisis, when the FED did decrease the short-term federal funds rate, but the long-term interest rate did not increase) or deflationary (such as the FED ’ s policy leading up the Great Depression). Former FED Chairman Ben Bernanke has accepted the Federal Reserve's role in causing the Great Depression by stating 'You're right, we did it. We're very sorry. But thanks to you, we won't do it again' at a conference to honour Milton Friedman (Bernanke 2000). According to Friedman, the Great Depression was a result of the failure on the side of the Federal Reserve to expand the money supply following a severe banking crisis. As one-third of all banks failed, the crisis resulted in a 35% contraction in the money supply followed by a 33% deflation creating a lasting damage on economic output. Meanwhile, the FED did not act by injecting liquidity, did not lower interest rates, and thus did not increase the money supply failing to act against what would become the Great Depression. Milton Friedman preferred the so-called k-per cent rule. In this policy, the FED would increase the money supply by a fixed percentage annually, irrespective of the economic cycle. It is vital to stress, nonetheless, that Friedman considered the involvement of the state in monetary policy necessary. On the contrary, Rothbard argued that too loose a monetary policy in the 1920s was the primary reason for the recession. Further, he argued that the FED's effective monopoly over the creation of money is the primary cause of inflationary pressure. In Rothbard's view, therefore, the state effectively has the incentive to depreciate the value of the US dollar, make the repayment of the US debt easier and in effect make recessions more severe by creating an inflationary environment (Rothbard 1994). Further, Rothbard argues, that since 1914 'inflations have been more intense and depressions deeper'. While the FED seems to have tamed inflation following the chairmanship of Paul Volcker, depression after depression, especially since the Great Depression of the 1930s, have had increasingly more severe consequences on long-term economic output. Credit cycle theorists argue similarly that the low levels
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