Who Should Chair the Fed?
As most readers are now aware, President Bush today nominated Ben Bernanke, current chairman of the President's Council of Economic Advisers, to succeed Alan Greenspan as chairman of the Federal Reserve. Bernanke previously served on the Fed's Board of Governors and was a professor of economics at Princeton University.
Over at Marginal Revolution, Tyler Cowen provides some useful links that enable his readers to learn more about the views of Ben Bernanke. Cowen also provides his own assessment of Bernanke, whom he rates “an excellent choice and a first-rate economist.” I don’t doubt that Bernanke isn’t a very smart guy who is well versed in the literature. (That said, where is the evidence he has read either Mises on the impossibility of central planning or Hayek on the pretence of knowledge and drawn the appropriate conclusions for central banking?) I’m not clear, however, that his high IQ and extensive knowledge of recent debates in monetary economics makes him a good, let alone an outstanding, choice. And even were he the best among those whom Bush would consider nominating, that would not make him “an excellent choice” per se. Indeed he could be the best of the bunch and still be pretty awful. Let me explain.
From the point of view of a libertarian or classical liberal who advocates the separation of money and state, none of the likely candidates looks very promising. And even if the question is “Who prospectively looks like doing the least damage?”, I’m not clear that Bernanke who favors inflation targeting (the Fed policy in the 1920s) should be the choice of libertarians or at least those who are aware of the malign consequences of a policy of price stability on the capital structure (remember the Great Depression—even though that depression was made much worse by a subsequent policy of monetary contraction and government price supports). See George Selgin’s"Less Than Zero: The Case for a Falling Price Level in a Growing Economy" (London: Institute of Economic Affairs, 1997).
For this libertarian, a truly excellent choice would be someone who argues consistently for the separation of money and state. Among those who advocate free banking with fractional reserves, two names come immediately to mind: Lawrence H. White and George A. Selgin. And among those who defend free banking with a hundred percent gold standard, Joseph Salerno is perhaps your man.
The ideal nominee would be prepared to freeze the operations of the Fed (its abolition requires, of course, the repeal of the Federal Reserve Act of 1913) and thus refuse to exercise government control over the banking system. I realize, of course, this would very quickly lead to calls for his removal by our ever-vigilant Congress (can the chairman of the Fed be impeached?) but before he could be forcibly removed (by court-ordered detention under a mental health act?), it would be my sincere hope that the public debate would have been considerably broadened by consideration of ideas that were once taken seriously by many economists, bankers, and legislators, and, indeed, implemented on both sides of the Atlantic (eighteenth-century Scotland and, to a more limited extent, Jacksonian America, etc., etc.).
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Mark Brady - 10/26/2005
I fear we may be talking past each other and I didn't help matters when I wrote, "the assumption behind central banking is that the State knows better than competing banks of issue as to how much credit should be extended to which economic agents." I agree that "few modern advocates of central banking believe that central banks should determine which economic agents receive credit." That said, I suggest that advocates of central banking do believe that the State is better informed than competing banks of issue as to when and how much credit should be extended in any particular situation, e.g., the bankruptcy of a major corporation. I trust that statement survives scrutiny!
Bill Woolsey - 10/25/2005
I am pretty sure that few modern advocates of central banking believe that central banks should determine which economic agents receive credit. Such a proposal would involve central planning. Well, I suppose there would still be equity finance that wouldn't be centrally planned.
I don't believe that either Mises or Hayek's arguments against central planning provide strong evidence against nationalizing the production and sale of electricity. I don't believe that having the government produce and sell a particular good in a market economy is a good idea, but it doesn't involve central planning of the economy. It involves planning the production of a particular good taking into account prices generated in the rest of the economy.
Private banks are pretty good at adjusting the issue of different sorts of money to the demands of depositors.
I don't believe that either a central bank or a system of competing private banks of issue are very good at gauging the demand for money.
Or, at least, I haven't been persuaded that there is an institutional framework that allows bankers to effectively utilize their dispersed knowledge in a way that adjusts the supply of money to its demand.
It is one of those tragic situations where all the alternatives are highly imperfect. In my view, the best argument for monetary privatization is the possibility of disasters--like the thirties or seventies. Maybe, at least, there is a framework of privatized money that would avoid such disasters.
Mark Brady - 10/25/2005
I just checked MarginalRevolution.com. I'm pleased to report that your comment is posted for the world to read.
Mark Brady - 10/25/2005
Central banking is, of course, not the same thing as the central planning of the economy that either Mises described in his justly celebrated 1920 article or Hayek in Collectivist Economic Planning (1935) and Individualism and Economic Order (1948). However, the assumption behind central banking is that the State knows better than competing banks of issue as to how much credit should be extended to which economic agents. The insight captured by the concept of the division of knowledge is applicable to banking just as much as it is applicable to the generation of electricity. And the consequences of disregarding this insight are surely more calamitous in banking than electricity production if only because contemporary economies are very largely monetized.
William J. Stepp - 10/25/2005
There should no more be a monetary policy than there should be an education policy, or a fiscal policy, or a foreign policy, etc. Why not monetary freedom, i.e., free banking?
James Grant has a superb article putting the Maestro in his place in the current issue of Forbes magazine.
When I posted this information to marginal revolution yesterday, along with a note advocating the abolition of the Fed, Tyler removed it.
So much for advocacy of free and open debate!
So abolish the Fed, now more than ever!
Bill Woolsey - 10/25/2005
"Positive" inflation is a rising price level. "Zero" inflation is a stable price level. And "negative" inflation is a falling price level.
Generally, I would say, "inflation rate" after positive, negative, or zero, using the term "inflation" to mean "positive inflation rate."
Among the monetary cranks, there are some who worry that the U.S. is about to suffer a major deflation. There is usually some statement about how the U.S. monetary system ties money to debt and how bad this is. Some advocates of this view think moving to a more explicit fiat system would be an improvement. Others advocate gold.
Bernanke responded to these concerns with an argument much like the one quoted here. I'm not exactly sure why the monetary cranks disagree with his argument. Bernanke's remarks suggest he holds to the mainstream view that the Fed's formal organization is not much more than a shell game, so that any debt/money relationship only applies to the private sector. With open market operations allowing for a six-fold increase in the monetary base, we have a long way to go before some kind of new monetary policy tool would be necessary to avoid deflation. The ability to print currency suggests that some way can be developed to avoid deflation, even if open market operations in govenment bonds are no longer possible. I think Bernanke is right.
I am pretty sure that Bernanke holds to the mainstream view amongst economists that central planning of the economy is a bad idea. Brady is simply mistaken if he believes that central banking entails central planning of the economy. While matching up the supply of base money to the amount of base money people want to hold is surely impossible to do perfectly and more difficult than a failure to match the quantity of electricity supplied to the quantity of electricity demanded, it is closer to nationalizing the production of electricity than to an attempt to develop a comprehensive plan for each and every sector of the economy and organize all of that activity using a massive bureacracy.
While I think Selgin or White might be O.K. as chair of the Fed, Salerno would be a disaster (he supports 100% reserve banking, right?) On the other hand, having a good feel for fundamental monetary reform doesn't necessarily imply that one will be good at running a monetary policy while advocating the fundamental reform. I certainly wouldn't want the job. And, on the other hand, Greenspan really didn't make much progress in promoting his view that the U.S. should return to the gold standard while doing a tolerable job of managing our current fiat regime. (I blame most of our macro problems on Fed errors, but it could have been worse, much worse. Like the thirties or seventies. I don't beleive I could have done better than Greenspan, nor is do I believe that even a ideal free banking framework would have had any better consequences that the actual macro performance of the last twenty years. Well--a bit lower inflation rate.)
I think a "policy" of first freezing the monetary base would be easy to implement, but it would be a disaster. That could well lead to a massive deflationary scenario. Have the unreconstructed Rothbardians changed their mind, or do they still advocate such a policy?
Kenneth R Gregg - 10/25/2005
On the LRC blog, Norman Singleton posted the following:
Thanks to Jeff Tucker (scroll down) at the Mises Blog for reminding us of this quote from Ben Bernanke, Bush's pick to succeed the Maestro at the Fed:
"The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
Positive inflation? Isn't that like positive cancer? Yet within minutes of his appointment, I heard the talking heads praising Bush's brilliant appointment, some even calling Bernanke the "anti-Miers" because all will praise his nomination.
If this quote is accurate, Mark, I wonder if Bernanke is a less dangerous fit than Miers is. I do hope that it was taken out of context.
Just a thought.
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