Nice summary of Fed folly.

If I understood you correctly, you spoke of the US money stock's losing a third of its pre-crash value as the "great contraction."

Was that just a different way of saying that the capital stock lost a third of its value, and that the money stock and capital stock were interchangeable terms?

I don't remember reading about a money shock before the crash.

The thing that bothers me the most right now is how the Fed, and Treasury, have bent over backwards to prevent price discovery of bank's illiquid assets.

Even the ban on shorting back last fall was designed to prevent price discovery.

Now, with the change in accounting, the banks are carrying severely impaired balance sheets like nothing is amiss.

In fact, they are doing so well, and are so flush with money, that they can return the TARP funds. After all, the plan is for you and I to purchase this theoretically valuable paper.

Why should the banks have to borrow taxpayer money, when they can sell us valuable assets instead?

Merill got 22 cents for their paper. That's where I'd be willing to step in.

I bet the PPIP is not going to go forward until the next crisis of confidence in the banks. or in about 4 months – October.

The Fed absolutely needs this paper to be worth something. It's what is backing our currency now. It what the Fed is going to have to use to mop up reserves someday.

The Fed and the Treasury have made a mockery of the free market. The stimulus at least goes through the motions of adhering to the free market – albiet, the demand is artificial, but monetary, bank, and accounting policy during this crisis has been horrible.

I literally cannot go near the market right now, because I don't have a clue what is truth, and what is fiction. All I know is, we are in for some real pain.

I agree with Don that we shouldn't give the Fed additional regulatory powers, but probably for different reasons. The Fed's job is to ensure price stability and "full employment" (wow… it sounds really antiquated to say that!), not to police the banking system. I think this drive to "audit the Fed" is highly ironic – because it risks politicizing monetary policy – something I imagine the Paulites would want to AVOID (as I would).

If the Fed were given some sort of Constitutional and institutional independence, with a clear constitutional delineation of powers that couldn't be adjusted by legislation, and with a clear appointment and confirmation process (just like the Supreme Court), I think it would go a long way to guaranteeing the independence of monetary policymaking.

Ummm… ya, pretty much. Aside from the GD – where I supose the Fed was still learning the ropes, and the subsequent inflation (which I think we can quite decisively blame on der Fuhrer), there's only been one major incident of instability (in the 70s – and even THAT episode was mild by historical standards – and now that episode is much better understood, thank to Friedman, Phelps, etc.).

Few have claimed that the Fed would work magic or that the Fed has worked magic in the past (I hope those Greenspan-worshippers got that out of their system at this point). But you hit the nail on the head – Don is right that there are "perils to central banking", but it has served it's purpose predictably and reasonably well. It's a human institution. I hope nobody was ever under the impression that it could work miracles.

I like the thinking outside the box on this one but I think we need to consider how explicitly political SCOTUS is these days (see current confirmation hearings!). Granting the Fed a constitutional mandate does not guarantee them political independence. In fact, it may make the situation worse – at least now not many people know/care what the Fed is!

I can understand how you value the capital stock. It's worth one third fewer dollars. But how do you value the money stock? It's worth one third less capital goods? But what are the capital goods worth?

You ask the right questions. A dollar is like a yardstick, measuring distances in inches. My penis is nine inches long (in my imagination), but how long is an inch? Well, it's an inch long, and that's as long as the bureau of standards says it is.

Money authorities may change the definition of "dollar" as a measure of the market value of things, to increase the value of their penises, and they routinely do.

Why hasn't anyone chimed in with: "Abolish the Fed and go on to a proper Gold Standard"?

Define "proper".

The Fed's job is to ensure price stability and "full employment" (wow… it sounds really antiquated to say that!), not to police the banking system.

The Fed can't ensure price full employment or even price stability, so it can only police the banking system, and policing the extension of credit is the central bank's job.

The whole point of a central bank is to limit the authority of other banks to create money by requiring them to "borrow" the money they create from a lender of last resort and then to repay what they borrow.

You'll never understand what a central bank is supposed to do until you understand what money was before central banks, and if you believe that money was gold, you're on the wrong track. Money was never gold. Money was always credit, and creditors always created money, even under gold standards.

Without a central bank, other banks still create money to lend it, and the money simply disappears as borrowers repay it.

Under a central banking system, only the central bank may create money. The central bank creates money to lend to other banks, and this money disappears as the other banks repay the central bank. That's the idea anyway.

When we confuse money with gold or some other durable commodity, we believe that money, once created, persists forever, but this understanding of money is utterly mistaken. Money does not obey a conservation law. It is not an elemental substance like gold.

With money, think of each country as a large banking corporation in competition with each other. It's more or less what you'd get if you had a bunch of enormous international banks doing free banking.

The Fed is not shackled or restrained in any way as it exists today. The article above makes it clear that the Fed does what it wants.

Under those circumstances wouldn't we recognize it as an independent institution?

Another fact, very few of the rules and principles enshrined in the Constitution has been left unviolated by past and present Congress(s).

It is a joke to speak of making a constitutional amendment to establish the Fed as independent, and then give it institutional powers that would be restrained.

The Fed is refusing an audit, "how much mo' independent do it gotta be"?
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"1929, by choking-off normal business credit. During the ensuing panic the Fed, pleading impotence, stood by while the U.S. money stock lost a third of its pre-crash value."

Now a question. In that scenario was the value actually lost, or was it just transferred to other parties, while the holders of the money were left sucking hind tit? Was the inaction due to doubt and confusion, or just part of the plan?

Another question, could that transfer of wealth be the reason the Fed stood by and let it happen?

Anyone who can look at the entire history of the Fed, the secrecy and stealth of its formation, its actions, its operating procedures, its power, its control of our government through loans, and finally the sucking of interest payments from the taxpayers, and not know instinctively that something is not right is pretty close to brain dead IMHO.

Rational examination of the Fed has to lead one to the conclusion that it is not owned by the American government (meaning you and I) and it is dangerous to us.

Those are words the JP Morgan liked better than Lender of Last Resort.

The central bank was created by bankers for banks.

E Pluribus Unum is actually a joke. It means you have no idea how overextended a bank really is, because they all look the same now.