Should we abolish the FED?
of long-term interest rates caused the Great Recession as they incentivized 'irrational exuberance' and risk-taking.
Table 3: GDP (1996-Dollars) from the United States Census Bureau - Historical Statistics, other data from San Jose State University. All data adjusted to 1929 = 100%.
Rothbard argues for the return of the gold standard, which is problematic. For instance, it does not allow for the expansion of money supply, when in risk of a deflationary environment. This puts a limit on economic growth. Moreover, the unpredictable production of gold increases short term price volatility. Leaving a void instead of the current FED system would be highly risky as no evidence like Hong Kong that would apply to a developed economy exists. Thus, there is no data to show the effectivity of amodel without centrally administered monetary policy. Even the HKM participates as the Hong Kong de facto central bank internationally and regulates the financial system. Moreover, to put the Federal Reserve's performance in context, over the 100 years of the FED's existence, there were 22 recessions in the United States with only one depression. On the other hand, the 100 years before the FED's existence saw 44 recessions and six depressions (Koba 2012). Thus, judged by the employment-maximization criterion of the FED, its existence is a significant improvement. Empirical evidence seems to suggest that independent and centralized monetary policy produces lower inflation with lower volatility in output (Blinder 2010). Paul Volker’s policy of higher interest rates tamed the inflationary expectations endemic to the US economy, as after 1981, the US CPI never reached the 7% level or higher again (see below). Furthermore, when Ben Bernanke set the 25 January 2012 inflationary target of 2%, he effectively anchored inflationary expectations to between 0-4%.
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