Here’s a letter to the Wall Street Journal:
John Dearie praises the Fed lavishly for its performance during the recent financial crisis (Letters, Dec. 16). Such praise is as deserving as that which would be heaped upon an arsonist who, after igniting a building into flames, does the same to a neighboring warehouse on the theory that the second fire will counteract the first.
The celebrated monetary economist George Selgin persuasively argues that central banks (including the Fed) are economically destabilizing. Moreover, even the role of lender-of-last-resort – explicitly praised by Mr. Dearie – hardly deserves such accolades as Mr. Dearie bestows. Consider Selgin’s discussion of the 19th century British origins of the lender-of-last-resort doctrine.
Selgin notes that “[lender-of-last-resort champion Walter] Bagehot believed that central banks were financially destabilizing and hence undesirable institutions and that it would have been far better had England never created one. He offered his lender-of- last-resort formula not as an ideal, but as a first aid to what was, in his view, a fundamentally unhealthy arrangement, the healthy alternative to which was free banking, with numerous banks issuing their own notes and maintaining their own reserves, as in the pre-1845 Scottish banking system. England needed a lender of last resort not to rescue it from crises inherent in competitive banking, but to limit the severity of crises that were inevitable consequences of the monopolization of currency.”
Again, an arsonist who tries to mitigate the calamitous effects of his pyromania is hardly a praiseworthy figure.
Donald J. Boudreaux