Review of End the Fed in BloombergSubmitted by gatchaman on Wed, 09/16/2009 - 23:03
Here is the link to the entire article by James Pressley: http://www.bloomberg.com/apps/news?pid=20601088&sid=a.SdDcVd...
I skip the beginning, and quote the end of the article:
'There are two snags. The first is that financial markets aren’t as efficient as economic theorists have hypothesized. If you don’t believe me, read Justin Fox’s history, “The Myth of the Rational Market” (HarperBusiness).
The other hitch is that banks play a unique role in society -- a role that even Adam Smith recognized, as Henry Kaufman writes in “The Road to Financial Reformation” (Wiley).
“The great champion of laissez-faire recognized the special character of banks as custodians of wealth, and the risks to society if they are left in irresponsible hands,” says Kaufman, a former Salomon Brothers Inc. managing director.
If we’re stuck with the Fed, we had better find a way to fix it. And that means understanding the muddled thinking that underpins central-banking decisions, as George Cooper has explained in “The Origin of Financial Crises” (Vintage).
Cooper, a fixed-income fund manager at BlueCrest Capital Management Ltd. in London, argues that central bankers are schizophrenic. When the economy is bubbling, they behave like Friedmanites, leaving the market to do its thing. Come a slowdown, though, they turn Keynesian, rushing to stimulate the economy with rate cuts. That’s how the Fed allowed excess credit to build up, cycle after cycle, inflating asset prices into what George Soros calls a “super bubble.”
Cooper’s solution: Oblige central banks to prick such bubbles by occasionally withdrawing liquidity from the market in what he calls “fire drills.”
This is unlikely to satisfy Paul, who deplores the “scoundrels at the Fed.” So perhaps he should reflect on the Panic of 1907, which ultimately led to the Fed’s founding.
When massive gold shipments drained into the U.S. from London after the San Francisco earthquake of 1906, the Bank of England moved to stanch the outflow by raising its benchmark interest rate to 6 percent from 3.5 percent, as Barry Ritholtz of research firm FusionIQ writes in “Bailout Nation” (Wiley). Other European banks followed suit.
To Ritholtz, the moral is clear:
“Unless all nations agree to do so simultaneously, the dissolving of a central bank amounts to the economic equivalent of unilateral disarmament.”'
In terms of the two snags, the author seems to argue that central banks are special and can be more efficient than inefficient free markets. I disagree with these statements, and the author does not offer further details in favor of these arguments.
In terms of the panic of 1907, would someone please explain to me why gold flowing from London to the US and interest rate increases by European central banks amounts to a unilateral disarmament of the US? Thanks in advance.