Friday, March 23, 2012

The Federal Reserve and the Financial Crisis

The Federal Reserve and the Financial Crisis
Origins and Mission of the Federal Reserve, Lecture 1 George Washington University School of Business March 20, 2012, 12:45 p.m.

An interesting lecture on the history of the Fed and US monetary history.

For Gold Bugs who don't won't to watch the whole lecture jump to the 26 min mark.

My critique of Ben's comments on the Gold Standard:
  • Yes, gold does take a huge amount of oil, labour and brainpower to locate, dig up, refine, transport and vault. Hence gold has intrinsic value, unlike the guy on the desk at the New York Fed adding a few zeroes to the money supply which takes little effort, and apparently no brainpower.
  • Yes under a Gold Standard the amount of gold held determines the money supply and there's not much scope for the central bank to use monetary policy - well what a damn shame that is. The world gold stockpile then to increase on average by 2% per year. So if we were on a Gold Standard the money supply would also increase by 2% year. Interesting to note the world's population tends on average to increase by 2% year. Some with a religious belief may be inclined to think this is by design. Of course all the world's major religious texts stating Gold and Silver are money are merely a coincidence to this 1:1 ratio.
  • Ben: "under a gold standard, typically the money supply goes up and interest rates go down in periods of strong economic activity. So that's the reverse of what a central bank would normally do today" - Well of course when the supply of a good increases the cost to buy, or in this case borrow, of that good goes down. That's basic supply and demand, a natural law, not a man made law.
  • Ben: "So again, because you had a gold standard which tied the money supply to gold, there was no flexibility for the central bank to lower interest rates in recession or raise interest rates in an inflation. Now some people view that as a benefit of the gold standard, taking away the discretion from central banks and there's an argument for that, but it did have the implication that there was more volatility year-to-year in the economy under a gold standard, and there has been in modern times" - Damn straight some intelligent people think this is a benefit of a Gold Standard. As to the volatility, Suck It Up! Regular downturns kill off the weak and useless businesses allowing better managed and innovative businesses take their place. In an Aussie context regular recessions are akin to control burns of bushland in winter to prevent massive bush fires in summer. Yes some trees get burnt, some cute furry animals die but the whole place doesn't go up come summer, killing everything. If prior to the 2008 financial firestorm we had regular downturns taking out some institutions before they become To Big To Fail would 2008 have been any more than a spot fire?
  • Ben: "Yet another issue with the gold standard has to do with speculative attack. Now normally, a central bank with a gold standard only keeps a fraction of the gold necessary to back the entire money supply. Indeed, the Bank of England was famous for keeping, as Keynes called it, a thin film of gold. The British Central Bank only kept a small amount of gold, and they relied on their credibility to stand by the gold standard under all circumstances to--so that nobody ever challenged them about that issue. But if for whatever reason, if markets lose confidence in your willingness and your commitment to maintaining that gold standard relationship, you can get a speculative attack. This is what happened in 1931 to the British. In 1931, for a lot of good reasons, speculators lost confidence that the British pound would stand gold, so just like a run on the bank, they all brought their pounds to the Bank of England and said, "Give me gold." And it didn't take very long before the Bank of England was out of gold cause they didn't have all the gold they needed to support the money supply and then, there was essentially--they've essentially had to leave the gold standard." - Well if they were running a Gold Standard that held Gold on a fractional basis then they were just liars and deserved to get called out on it. One of the strengths of a true Gold Standard is if the market no longer believes you have the gold to back your issuance of paper claims on that gold you get punished for your crimes. 
I could go on but I am starting to rant, and that I will leave to Alex Jones. Personally I don't believe in a Gold Standard (although it seems to be better than what we have now). I believe we should have a free market in money, radical I know. If a business wants to sell their products in grams of 9999 gold or 999 silver go for it, if others want to trade in dates, rice, wheat, oil, sugar they can do that to. The market will quickly work out what the majority of buyers and sellers prefer and create payment and collections solutions around this chosen range of trade able items. In the US there is currently a black market using Tide washing powder as the currency, and why not? it is fungible, has intrinsic value, can be stored for later trade and cannot be created in infinite quantities.

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