I agree with Joe Stiglitz

by Russ Roberts on September 5, 2011

in Monetary Policy

He thinks the Fed is corrupt. (HT: Seth Goldin) Too bad we don’t agree on what to do about it.

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NotSure September 5, 2011 at 9:10 am

Without reading the article, I am sure that the solution from Stiglitz is to create yet another government agency, because setting up more and bigger government departments somehow will stop corrupt politicians and businessmen.

vikingvista September 5, 2011 at 3:34 pm

The solution to government failure is always bigger government–and subsequently bigger government failure.

muirgeo September 5, 2011 at 9:15 am

I did not see him comment on what to do with the Fed. Any organization that has one foot in the government and one foot in the private sector is doomed to rent seeking and poor oversight. Right now the Fed is functioning like a GSE. Nationalization seems a reasonable thing to do. What little I know of the economy it sure seems one of the most basic but difficult things to order is how we do money.

Russ Roberts September 5, 2011 at 9:33 am

This may be my favorite comment of your entire corpus. It already is nationalized, my friend. That’s why it’s corrupt.

muirgeo September 5, 2011 at 6:33 pm

Russ are the 12 reserve banks public or private? Does the Fed have any direct oversight from government officials? Again…. it has more of a GSE type of structure and THAT makes it more prone to corruption.

The Bank of Canada is, I believe, fully “nationalized” and has no private ownership unlike our system and it has been more stable than ours.

jjoxman September 5, 2011 at 8:57 pm

Canada also has no Fannie Mae and Freddie Mac to artificially encourage house ownership.

Russ Roberts September 6, 2011 at 2:05 pm

They are public. And yes–the government oversees the Fed. Badly.

John V September 5, 2011 at 10:08 am

dense as ever.

jjoxman September 5, 2011 at 9:39 am

So Stiglitz thinks the only problem is the structure whereby the Fed branches are partially owned/governed by the regional banks. While this is part of the problem, it certainly isn’t the whole or even main problem.

The main problem is the existence of a money monopolist that is essentially captured by the federal government. Any central bank will have this problem. The only solution, one that I’m sure Stiglitz would be 100% against, is free competition in banking and note issuance.

JS September 5, 2011 at 10:45 am

There might be intermediate steps that could be taken, but they all involve reducing Federal power, which is unlikely. Repealing fractional reserve banking laws would restrict the intensity of the boom-bust cycles caused by credit expansion and printing money.

Repealing institutional bankruptcy while keeping it intact for personal bankruptcy, or maybe having laws that disqualify corporations from the protections afforded by bankruptcy if they violate legally established leverage ratios. In other words, if Lehman Brothers owners and officers would have had had at risk their personal fortunes, would they then have run up the leverage ratios to what they were? Should there be a legal limit for corporations, and when it is breached, the protections afforded by limited liability laws would no longer be available to them? In general, should the laws associated with business failure be re-examined?

Would it have been possible, in 2008, for our government to handle the crises by guaranteeing all bank deposits and then allowing all the financial speculators and investment banks to go bankrupt? The main reason for bailing out the ‘financial’ industry was because of the systemic risk that they claimed would affect ‘main street’. However, a crises ‘guarantee’ of all deposits would have insulated main street from the Wall Street gambling houses that were making billions off of leverage ratios that only existed because of laws that reduced the associated risks.

kyle8 September 6, 2011 at 7:31 am

Perhaps the first TARP was necessary to stave off a total collapse. but none of the subsequent meddling was needed at all. Better let the bankruptcy laws work. That is what they are for.

vikingvista September 5, 2011 at 3:38 pm

Is there any mainstream scholarly work on the theory of monopoly and how that theory must necessarily be applied to government? It seems to me that any advocacy of a government solution implicitly assumes a solution to the problems of monopoly.

JS September 5, 2011 at 9:55 am

The article mentioned similar statements from Elizabeth Warren and George Soros. They all see the corruption potential at the FED coming from the banks who are being regulated, who have access, rather than from the Legislators and President, who want to manipulate the money supply in order to advance their socialist agenda. The socialists ‘democrats’ need a perpetual easy money policy to help pay their bills ‘through inflation’ without having to burden the nation with unpopular requests for tax increases. They need the FED to steal the money from the masses through a stealth program of dollar devaluation and its reduced purchasing power.

As long as the FED is already ‘politically corrupt’ to the Federal government I’d rather have them employ policies that steal from the lower and middle classes to pay for the programs that politicians market to them in exchange for re-election, rather than force our politicans to extract equal amounts from the true productive sectors of the economy through the use of poltical tactics such as envy and class warfare.

Muirgeo, nearby, thinks that Nationalization is the reasonable thing to do. If his goal is for the masses to pay for their equal share of the welfare state through a steady reduction of their purchasing power, simliar to how it works in Central and South America, while the wealthy remain unaffected, then he should go for it.

It is in this way that social justice turns into poetic justice.

JS September 5, 2011 at 10:02 am

I was assuming Muirgeo meant to Nationalize the banks, since I’m not sure what Nationalizing the FED means.

Methinks1776 September 5, 2011 at 11:31 am

Well, that makes two of you. The difference is you know it doesn’t make any sense.

brotio September 5, 2011 at 8:24 pm

LMAO!

Chucklehead September 5, 2011 at 10:47 am

“Too bad we don’t agree on what to do about it.”
So what is your solution? Go to copper, silver, gold, & platinum coin? Bitcoin?
Why wouldn’t bank issued notes fall into the same tendencies of central banks?
We have free competition in money called foreign exchange. There is a constant shortage of sound currencies, and surpluses of the dollar.

Methinks1776 September 5, 2011 at 11:37 am

Why wouldn’t bank issued notes fall into the same tendencies of central banks?

They would, but competition would drive them out of business. There is no workable alternative to the monopoly of the Fed currently.

We have free competition in money called foreign exchange.

Not really significant competition. You can’t use Euros or Riyals to purchase things in the United States. What competition exists among currencies is insignificant and manipulated by government monopolies – as are the alternatives like gold.

Chucklehead September 5, 2011 at 1:08 pm

Then what would you suggest as a alternative? A Fed that can only inflate (increase money supply) 3%?
What concerns me with banknotes is you have to keep up on the banks financials. If each individual must spend that kind of time, it will be extremely wasteful expenditure of human capital. Even if I have the expertise and time, there is no assurance that the data I work off of is good. The time taken for tax forms is bad enough.

Methinks1776 September 5, 2011 at 4:54 pm

I the more I learn about the banking system (and I do not consider myself learned on the subject by any stretch of the imagination), the more I lean toward getting rid of the Fed altogether.

What concerns me with banknotes is you have to keep up on the banks financials.

Well, we weren’t doing that before. We were leaving up to our benevolent government and look how well that turned out.

If each individual must spend that kind of time, it will be extremely wasteful expenditure of human capital.

I know virtually nothing about cars, yet I’ve always made good purchases from the time when when I was a starving student to now – thanks to consumer reports. I also know virtually nothing about the tax code and even less about law, so I hire lawyers and CPAs. There are people who don’t know how to manage their money, so they hire people to do so. Every day we must make important decisions in areas in which we are not experts. Choosing a bank is just one of them. There’s nothing special about banks in that regard.

All that will happen is a “consumer reports” type of certification will be demanded by people like you and me and that demand will be filled by an entrepreneurial person who will hire a bunch of bank analysts to do the job and publish it for subscribers. In fact, a version of this already exists in the equity research departments of investment banks. In such a universe, I expect to choose my bank the same way I choose my car and my doctors – word of mouth and rankings compiled by competing publications.

Chucklehead September 5, 2011 at 11:09 pm

Although I agree with all of your points, I am still leaning to a elemental commodity based money as a Fed replacement. As you pointed out, it is not perfect, but it has the fewest problems overall.

nailheadtom September 5, 2011 at 12:08 pm

Fiat, state-controlled currency is required for the payment of taxes, which are then used by the state for social engineering purposes. The IRS doesn’t want potatoes or quilts or canned salmon or even silver bullion, they want pixels that represent little pictures of Ben Franklin. The state wants to be able to determine the number of those pixels circulating about the economy, an easier task than it was for Septimius Severus to debase the Roman coinage.

Reverend Moon September 5, 2011 at 2:01 pm

I bet you people around here would like to see a return to the gold standard in order to limit how much the “Fed can inflate the money supply”.
At the same time, you probably think that Keynes’ suggestion that having people dig up money buried in the ground during a recession is laughable. You guys ever try to reconcile those thoughts?

I agree, the Fed and Treasury have been corrupted by the institutions they are to supervise and regulate.

Methinks1776 September 5, 2011 at 7:29 pm

No, I do not support a return to the gold standard and, when the subject has come up in the past, neither have a majority of commenters here. I’ve never seen either Don or Russ suggest such a thing.

So much for your straw man.

If you think that digging ditches and filling them back in again will make you prosperous, try it for a year and let us know how much richer you are.

Reverend Moon September 8, 2011 at 11:08 am

I’m curious then, if “free banking” is your preference, what would be the unit of account? I suppose you’ll say, “it can be whatever successful banks and their customers choose”. What you would like as the unit of account or is your gripe solely about the fed’s fiddling with interest rates. Or are you just disappointed by the likes of Ms Wylde and Bernanke?

Reverend Moon September 8, 2011 at 11:10 am

It was about digging money out of the ground not digging holes and filling them back in.

Chucklehead September 5, 2011 at 11:14 pm

” Keynes’ suggestion that having people dig up money buried in the ground during a recession is laughable.”
Keynes did not suggest that we dig up our savings to spend in tough times, he suggested that we borrow and spend frivolously, and that would bring prosperity.

Methinks1776 September 6, 2011 at 11:04 am

JMK did, in fact, suggest burying jars of money and digging them up again to “create jobs”.

Chucklehead September 6, 2011 at 12:38 pm

He must of enjoyed opiates regularly.

Robert Dell September 6, 2011 at 10:21 am

In his book, “Freefall,” Stiglitz’s criticism of the Fed is more fundamental than that from this piece in the Huffington Post. While stopping short of endorsement of a monetary rule, he expresses a view quite similar to those of Friedman, Meltzer, Taylor etc.:

“In virtually every interpretation of the crisis, the Fed was at the center of the creation of this and the previous bubble. . . . [W]e live in a country of laws; not of men: should we have a system requiring that the Fed first be burned by fire to ensure that another won’t be set? Can we have confidence in a system that can depend so precariously on the economic philosophy or understanding of one person—or even the seven members of the Board of Governors of the Fed?”

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