Comes now Rep. Kucinich, striking while the iron is hot with proposed legislation to eliminate fractional reserve lending and nationalize the Fed.
Discuss, please. Very interested especially in economists’ takes on this.
Good to see that Denny there isn’t worried about trying to accomplish anything relevant.
We’re not getting off fractional reserve. Ever. At least, not without an economic apocalypse. Moreover, forwarding such a suggestion in the United States Congress is ultimately pointless. If the whole Ireland/Iceland/everywhere else element to the banking meltdown has taught us anything, it is that attempts at systemic reform to banking must be implemented globally to be effective at all because it only takes one bad segment to severely damage the bunch. If anything, this is something that you’d start out at the G-howevermany or the WTO and work your way down.
Further, I’m not really sold on giving the public direct control over the size of the money supply as a good idea. The primary reason why fiscal policy fails by itself is because it is beholden to politics. Monetary policy was specifically formulated to create a body that could do things that the public might strenuously object to that are in its best interests. Like raising interest rates ever, for example. Moreover, there is actually a right way to manage the money supply. The money supply under a fiat currency model is supposed to grow and shrink with the total produced wealth of the underlying economy specifically to avoid currency-derived price distortions, like the -flations. If what he’s angling for is some variety of redistribution of wealth, trying to affect that through the money supply fundamentally misunderstands economics.
Basically its crazy. Have you seen how irresponsible Congress is? Do we really want to give them more power of the economy’s fate?
Bigger answer: there are two separate but related things here:
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Why eliminating fractional reserve banking is crazy: It’s not solving any particular problem. Fractional reserve banking is a useful way to expand the money supply in such a way that capital remains available. If you eliminate it you necessarily limit the availability of capital, which necessarily means less economic activity. Also it’s not at all a problem. Our recent financial woes have nothing to do with actual banks (in the fractional reserve sense of the word) because these banks are very heavily regulated. The problem is the so-called shadow banking system, which performs a similar function but isn’t nearly as well regulated.
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Why giving Congress control over the money supply is crazy: Congress can’t be trusted to tie its shoes correctly. Also politically controlled money supply is usually a recipe for disaster. The Fed was insulted from political pressure for a reason.
The fractional thing is hilarious, I wonder where he got that from?
Has anyone actually done substantial amounts of work showing that in first-world industrialized democracies central bank independence matters all that much? I see one scenario where it helps, I see another where it just hands power to other interests - big financial players, for example.
I ask because the more I find out over the years the more I wonder what the hell the point is. The Fed’s vaunted independence didn’t stop Arthur Burns from doing whatever the hell Nixon wanted him to do.
I’m not aware of any, but that’s probably because they all got themselves independent central bankers around the turn of the 20th century.
There’s a pretty good theoretical and historical case to suggest that Congress won’t tighten the money supply when it needs to. Can you think of anything that suggests otherwise?
I’m not arguing that Congress will be any good at it, just that in practice it’s not obvious it makes any difference. The Fed is effectively run by member banks, apparently, which do not exactly have strong incentives to behave properly either.
If I’m reading this correctly the Bank of England wasn’t really independent in any substantial way until 1997.
That Mother Jones article asserts that it’s the member banks that run the show, but provides literally no evidence to make the case. 5 of the 12 members of the FOMC are from the member banks; that’s the extent of their influence. It’s not nothing, but it’s a very far cry from “effectively” running the organization.
I already have. It’s a good book, although at one point he goes into this extended money-as-fecal-matter metaphor that left me scratching my head.
Oh man, I’d forgotten about that. Fun times.
Derpus Kunidiot screeches again. I move that Congress moves to move him to the bottom of the ocean, where he will no doubt be fine as nothing can crush anything as dense as his brainless skull.
Yeah it was a pretty hilarious. It was a pretty hilarious indulgence in what was otherwise a really good history of the Fed.
It seems a bit crazy, and I’m torn on it.
Kucinich’s point about the Fed being effectively run by banking insiders, by and for their benefit and with starkly limited accountability, is spot on. I also don’t buy the status quo line that getting rid of it is inherently crazy and would immediately tank the economy; frankly, I think many drink the cool-aid a little too readily on this issue.
On the other hand Congress is slow while some things merit fast action, there is a huge hazard of Tea Party style idiots willing to play chicken with the economy for political gain, and it’s not exactly like Congress itself is free of influence from the banking elite.
As for fractional reserve lending… Well, I would agree that banks are vastly over-leveraged, but get rid of it entirely? Maybe we aught to take it a bit more slowly…
In addition, the Monetary Authority would give 25% of money created to the states, and a tax-free dividend to all US citizens to inject liquidity into the economy. All without incurring one penny of debt.
This bit also sounds like a recipe for inflation. Then again, it’s interesting that some of the inflationary cash would go to citizens directly… Talk about redistribution of wealth!
We have our ups and downs now but the boom and bust cycle in the 19th century was far harsher, and far more devastating for the layman than what we’re dealing with now.
I think there can be more to getting rid of the Fed as it is now than simply going back to the 19th century. I have no clear idea of how best that might be done, but nor am I convinced it’s unavoidably a bad idea.
What we have now is clearly broken for all but the very rich and only getting worse, so there’s good reason to look for something better.
The hell with it. If you actually think that banks are baed mkay, that our current system is soopar ebil and that we’d be better off without the Fed, you just aren’t operating in a rational framework that I can engage with.
What good does it do for me to explain the current system and why it’s generally very effective at, you know, getting people the money they need to do productive things if you’ve already got faith that it’s bad?
I mean, faith, everyone knows it matters more than logic, data, knowledge of how the current system works, actual results, etc. It’s faith.
And of course now it will be time for people to explain that hey, we’re in a nasty employment situation brought about by a failure of the financial system (and capitalism failing will probably enter the discussion). Because, you know, a single mis-priced financial asset followed up by some serious pants on head retarded governmental action in numerous countries that had similar faith in the badness of market economies is definitely definitive proof that banks are the devil.
Finance is complex. An effective, efficient banking system is essential to any sort of economy other than one along the lines of hunter gatherer style shit where most people die by the age of thirty, or barter systems totally unworkable in anything other than a socially cohesive and ethnically homogeneous community. Even the Egyptians – yes, the fucking Egyptians – had banks before they had pyramids.
If you want to believe that a ridiculed moron who couldn’t even run his campaign without being subject to mockery over his ineptitude could figure out a better economic system than the one we’ve got right now, which happens to have been tested in the fires of history, the research of experts and the weight of public opinion, go right ahead. It’s not like capitalism has done more to lift people out of poverty than every NGO and alternative economic system combined, right? And of course we’re all living in abject misery as wage slaves, not enjoying the highest living standards of any society on the planet, ever. Fucking banks and capitalism! Anyway, ignoring reality, logic, data and evidence to the contrary is what faith is all about! So you go right ahead.
If you’d like some actual reading material, however, and maybe a little bit of evidence to stack up against the no doubt formidable intellectual powers of Screechy the Populist Demagogue, I’d be happy to help you there. But I’m not gonna waste my time arguing with faith when I have my air conditioned wage slavery to deal with.
I don’t think anyone in this thread is actually talking about Kucinich’s proposal, because, well, he’s an idiot.
And you wonder why people tune you out? “soopar ebil” indeed.
What good does it do for me to explain the current system and why it’s generally very effective at, you know, getting people the money they need to do productive things if you’ve already got faith that it’s bad?
Actually, I would say you’re the one with an over abundance of faith here. I bet you’re the sort who once put Alan Greenspan on a pedestal.
I don’t think Kucinich is generally an idiot, but this proposal does seem uncharacteristically crazy as in the past I’ve felt he had solid economic advisers.
I like the general idea of what he’s getting at and his analysis of what’s wrong, I’m just not convinced this particular plan is the right way to get there.