The CATO Institute Finds That The Fed Must Be Abolished

Tyler Durden's picture

A must read paper from George Selgin and the Cato Institute, which confirms what Zero Hedge has been saying since inception: the Fed must be abolished immediately: "The Federal Reserve System has not lived up to its original promise. Early in its career, it presided over both the most severe inflation and the most severe (demand-induced) deflations in post-Civil War U.S. history. Since then, it has tended to err on the side of inflation, allowing the purchasing power of the U.S. dollar to deteriorate considerably. That deterioration has not been compensated  for, to any substantial degree, by enhanced stability of real output... A genuine improvement did occur during the sub-period known as the "Great Moderation." But that improvement, besides having been temporary, appears to have been due mainly to factors other than improved monetary policy. Finally, the Fed cannot be credited with having reduced the frequency of banking panics or with having wielded its last-resort lending powers responsibly. Its record strongly suggests that the Federal Reserve‘s problems go well beyond those of having lacked good administrators. Although it has manifested itself in different ways during different decades, the Fed‘s failure has been chronic. The problems appear to reside with the institution, and not with particular personalities who have been placed in charge of it. Hence the record would not be likely to improve substantially even with complete turnover in the Board of Governors. The only real hope for a better monetary system lies in regime change."

“No major institution in the U.S. has so poor a record of performance over so long a period, yet so high a public reputation.” Milton Friedman (1988).

Ending the Fed is the only hope America now has. The outcome will be painful, but it will be surmountable. The alternative is the unquestionable end of America's status as a superpower.

Has the Fed Been a Failure? (pdf)



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Orly's picture

"...Its record strongly suggests that the Federal Reserve‘s problems go well beyond those of having lacked good administrators..."


Like what?  An out-right and organised fraud against the middle class of America?

Say it ain't so!

Azannoth's picture

I think the bankers went fox mad, like when a fox enters the hen house he will kill all hens not only those he can eat thus, I think it's a 'base race'(for those who play RPGs) either the Country or the Fed, me personaly if I was living in the US I'd be looking for a new citizenship, good for me I am living in Germany which is the sanest loonatic in the European asylumn now :) 

snowball777's picture

That still makes you batshit crazy; there are no winners in a poop fight.

Dirtt's picture

Azannoth.  You have no idea how many of us have already considered emigration.  The 2008 election was the most inexplicable event in my life.  If THAT was America...

We may be down but we are not out yet. YET.  Very little sand left in the clock.

11b40's picture

Not that my guy won in 2008, but at least there was a clear do explain 2000?

Boba Fiat's picture

I voted for Harry Browne in 2000.  But Bush was the clear winner (by electoral college vote, which is how presidents are chosen in this Republic).  No one really disputes that.  Al Gore would've accelerated our collapse; not saying that's good or bad--but he was a white Obama-in-waiting.

freemarketfantasy's picture

I beg to differ on the "no one really disputes that" claim.  Greg Palast did a pretty excellent writeup on the 2000 election in "The Best Democracy Money Can Buy".  The Florida Central Voter File(1) is a good place to start on the controversy.  Also I doubt Mr. Gore could've done any better of a job of collapsing the American emprire then dubya and his neocon cronies did.



LowProfile's picture

Team Gore tried to steal it first with the premature victory call, among other things

Then Bush stole it back.

Basically, the better thief won.  Guess who was the loser, no matter WHO won?!

Wake the fuck up.

BrosMacManus's picture

Took me a couple weeks to process and come to grips with it....haven't been right since. Oh, I know, it's probably because I'm a RAAACISSSST. That's gotta be it. /sarc

Nuthin' but bad options, all around us. However, if knowledge = power, then ZH = noetics. 

hvl626's picture

A brief mathematical analysis of the Fed operation, detailing the inherent self-destructive nature of the Ponzi scheme, and its fraudulent nature, is posted at


Danielvr's picture

Like what?  An out-right and organised fraud against the middle class of America?

Where were you when the FED was keeping interest artificially low to prop up the housing market, so every greedy middle-class American could get himself a big house and use its ever increasing value as his personal ATM machine so he could goble up all the world's wealth and squander his children's future? I didn't hear any complaints about the FED and US bankers in the 1990-2006 era when the REAL crime was being committed. Hypocrites.

EvlTheCat's picture

No, being hypocritical includes professing feeling or virtues one does not have or believe in.  Most average Americans believe the problems they are witnessing are happening in real time, and are due to current problems,  because that is how we are trained to think.  Ignorant?  You can call us that all day, but hypocritical not so much.  Though I didn't see many "educated" and, "enlightened" Europeans burning, and rioting, before the recession.  Now who is being hypocritical?  Knowing about a problem and keeping your mouth shut so the money keeps rolling in and then jumping on the accusation bus is bullshit.

Oh yes, and we "greedy" middle-class Americans are the ones which fund most charitable organizations at home and abroad.  So as you contemplate Obama as  the worlds "Hope and Change" candidate remember when the middle-class American money dries up charities world wide will suffer.  An example of Europeans being Hypocritical would be supporting, Obama to get him elected, and now bad mouthing Americans because we elected him...  I voted for Ron Paul who did you support?

Danielvr's picture

No, being hypocritical includes professing feeling or virtues one does not have or believe in.

Like playing victim and blaming the bankers for problems that were equally of the people's and the government's creation..

Most average Americans believe the problems they are witnessing are happening in real time, and are due to current problems,  because that is how we are trained to think. 

Then they are doomed to repeat the same mistake of easy money policy again and again.

Oh yes, and we "greedy" middle-class Americans are the ones which fund most charitable organizations at home and abroad. 

That's a myth. On a per-capita basis, Europe and Canada are quite a bit more generous. See 

(and that is not counting America's 60+ years of 'colonizing' the rest of the world through its US dollar. Put some ink on a bit of paper, exchange it for valuable products and resources from abroad, and shut the windows and lock the door when those people want to redeem them).

So as you contemplate Obama as  the worlds "Hope and Change" candidate

I don't. I think he has disappointed many people including his own voters. The US could do many things to radically improve its situation and rebuild confidence among its people and its financiers - e.g. build large numbers of thorium reactors to wean itself off foreign oil and to have infinite amounts of cheap, safe and clean energy to rebuild its economy. That's the sort of initiative that a TRUE leader, who dares to defy the short-term interests of the oil industry, would take.


iconoclast63's picture

I think you are referring to the time when the FED was keeping interest rates artificially low to keep the MULTI-TRILLION DOLLAR gravy train for the investment bankers rolling while they saddled the middle class with a mountain of worthless debt!!!

You are a piece of shit cumstain who really doesn't have a clue what really happened as the real wealth of retirees pension funds was being STOLEN by the financial terrorists on Wall St. You know that is who bought the mortgage backed securities right?

Did you read the latest effort by Matt Taibbi in the Rolling Stone?

Sanctimonious asshats like you REALLY piss me off!

Danielvr's picture

I think you are referring to the time when the FED was keeping interest rates artificially low to keep the MULTI-TRILLION DOLLAR gravy train for the investment bankers rolling while they saddled the middle class with a mountain of worthless debt!!!

So, do you agree that THAT was when the real crime was committed? And that nobody was complaining when it happened because the gravy train benefitted everyone - either directly through nearly unlimited credit, or indirectly through a thriving economy and ever increasing salaries?

I hate how the bankers are still filling their pockets while so many others, including the US government, are in dire straits. But if it wasn't for the FED's inflationary policy, things would be looking a lot worse right now for the middle class - think mass bankrupties in the private sector, mass unemployment, crashed stock- and housing markets. All that may still be ahead but for now, the FED's policies are cushioning the blow and shifting much of the damage to Europe and Asia who financed that golden era.

functionform's picture

This is America Danielvr.

It's bad luck if it happens to me, it's a failure of personality responsibility if it happens to the other guy.  

Everyone loves pointing the finger.  It's so easy!

ToNYC's picture


Amazing misdirection artistes, they have unilaterally decreed a 90% tax on US saver's interest expectations. They call it ZIRP and enticed the paradigmatically- blinded with  poisoned and trap-door eligibility for low mortgage rates based on infinite slicing of the ever-growable housing cake, so it goes down without the normal gagging response.


They step in front of our saving trade and dividend collection and create their own new equal-looking and completely dilutive as a further rip to US savers paper to use for their member banks to collect every bp of the spread or rent on the fake money and the people are shut out.

You will find panels of these nitwits on MSM unable to contemplate modern finance without the Fed. No figure.

doggis's picture

ok this will sound uber dumb, but if you get rid of the fed now, and keep the fractional banking system as you know it - then the fed replacement will have to be an international body - aka world body - "new world order' type stuff....i hate the understanding of the fed for all the right reasons, but it is now the only thing standing between US soveriegnty vs global (one world government)....  in fact with this latest move of QE2 - the fed is actively and consciously pursuing its own demise - which leads to the question of "why"?

Azannoth's picture

This is exactly what the banksters are counting on, a clueless ignorant American public that will accept any 'solution' so they can keep buying their ICraps

the grateful unemployed's picture

the fed isn't the crafting dollar policy, but the are the curtain which the wizard is hiding behind. (Pay no attention to the man behind the curtain!) The Fed monetizes the debt, they don't create the debt. So you're correct, without the veil between the real workings of vernment and the public perception there is an interface, which frankly we could do away with. We all know what a rotten thieving system we have, but it works in our favor, against global forces, (though not very well obviously as the Chinese have fucked us royally, but we let them, our own fault) but sure abolish the Fed in the interest of transparency.

Boba Fiat's picture

But David Rothschild is sooooo cute with his scruffy good looks.  Have you read some of his proposals?  Why shouldn't we all surrrender our liberty to a ruling elite when it's proposed by such a hottie?  I hope he's on Dancing with the Stars.


nmewn's picture

"Why shouldn't we all surrrender our liberty to a ruling elite when it's proposed by such a hottie?"

As long as they make the world safe for Volvo drivers ;-)

Yes...that was sarcasm.

trav7777's picture

must be nice to be so rich that when you take a shit on the rug, people applaud.

He says Saturn and Jupiter are closer to the sun than the earth...that's

and people still believe in potent directors?

Azannoth's picture

He wants to rule the world but can't get the order of the platents correct, than again so do most of the public so I guess you get what you deserve

ToNYC's picture


Of course the fractional reserve credit extention and exposure need to be more closely subject to growth rates as in the hold-your-own-originations ratio.

snowball777's picture

The tail doesn't wag the dog...the Fed may make bubbles worse, but they are not the initiator; pretending that abolishing the Fed will solve any of the problems with securitization, regulatory capture, or endogenous money creation is as foolish as blaming Mexicans for jobs outsourced to Beijing while shopping at Wal-Mart.

Dirtt's picture

Raising interest rates would solve many problems for Americans.

Max Hunter's picture

That's a great idea.. It would be a blessing to spend a trillion dollars a year to service our national debt and fatten up the bankers and wealthy... Interest is usury.. I know people think it's great that having money can make you more money from the people that don't have money,,, but.. the system is a sham..  We need an ENTIRELY new system.. Period..

MurderNeverWasLove's picture

I'm with you there, Max.  The usurious system has outdone itself, and without evolving past the money=debt idea, we won't honestly be fixing anything.


We need some deep thinking about what that new system could be.


It's easy to want to end the Fed, but not really so easy to come up with what we go with after that.  I think without a good alternative or three, we will end up right in the laps of the IMF and such, exactly where they wanted us all along.

chrisina's picture

The number one cause of our problems stems from the fact that we've allowed the monetary/credit system to grow much faster than the economy during the last 30 years :

CREDIT grew at an average rate of 10% per annum, while the economy grew at an average rate of only 3.5% per annum. And most of the growth of the economy actually came from this accelerated credit growth and benefitted only the top 1% of the population.

Please consider that CREDIT is not created by the FED but by the commercial banks and the shadow banking system, the FED just being an instrument of this network of debt creators. It's a tool, and a tool controlled by them. Getting rid of the tool and leaving the banking cartel intact won't change a thing : they'll come up with a new tool immediately thereafter. And chances are abolishing the FED without thinking of what's comming next will just accelerate the worldwide centralization of money power in the hands of the IMF/BIS.


I agree that we need a completely new monetary/credit creation system, one that obeys to the strict rule that CREDIT should not grow faster than the economy (ie where CREDIT/GDP remains more or less constant). Instead we have left CREDIT grow from 180% of GDP in the 70s to more than 350% nowadays (excl. unfunded liabilities!), and this has only benefitted mainly the very few who own the banking cartel.

Whether this means abolishing the Fed is IMHO secondary. It's like building the house from the roof. WE must first agree on what that monetary/credit system must do for us, the American people. Define the requirements first, then what is the best implementation, and make sure that this is done by people who are not corrupted by the current banking/credit creation cartel, unlike most economists who are hired by them directly or indirectly and follow an economic theory, neoclassical, which was derived in the first place to benefit the banking cartel and not the American people.


But the first difficulty is that this can only be a bottom-up process. It must come from the American people who must demand it from the PTB and overthrow them if they don't respond satisfactorly. But the American people are mainly asleep... So, Zerohedgers and all people of good will, let's continue to try to wake them up!

nodhannum's picture

Max, I think there is a difference between borrowing money and paying interest for say going to Vegas to do cocaine, hookers, etc. and developing the latest iCrap or MNR scanner.  Not that the average american could tell the difference.  The money that an individual saves represents his "delayed gratification" and I think he/she should be rewardedfor that (call it interest or whatever).

Widowmaker's picture

Simple truth will set you free.

hbjork1's picture

IMO Correct snowball.

It is the capture of the Fed by the entities that should be allowed to fail that is the problem.  I can't speak to other eras but a more severe consequence in the failure of the California Savings and Loan would have alerted the operators in the coming decades to the possiblity of  severe outcomes.  The LTCM bailout of the Chase was a full boat bailout of the losses at the Chase. 

There must be consequences if we take actions that hurt other people.  It should not be a game.  Being smart or well trained doesn't make a person ethical.  And even well meaning people can get lost in the matrix if no one around cares or sees.

Hank Paulson was an Eagle Scout.  Boy Scouts take an oath.

On my honor, I will do my best
To do my duty to God and my country and to obey the Scout Law;
To help other people at all times;
To keep myself physically strong, mentally awake and morally straight

I have to wonder if he got "lost in the matrix."


Widowmaker's picture

If Hank was so great, why didn't he use his one opportunity to save the world to include justice and principle?

One could start at "be prepared."

ToNYC's picture


Thats a great point. The initiator is in bed with the apologist who can't conceive with life sans partner.

It won't change, until you do...and blame yourself for not fixing yourself first.

the grateful unemployed's picture

From Bob Prechter:      

 Fed's Actions Create 'Hope-filled Bulls' and 'Irresolute Bears'  

Our stance for years has been that the Fed doesn't lead the markets so much as follow them, and that monetary policy doesn't change the U.S. economy for better or worse. So we tend to ignore the Fed and urge others to do likewise. But as social mood grows more negative and the economy continues to flounder, even a columnist for the New York Times now dares to write about how the Fed's efforts to revive the economy are being criticized right and left.

Here's an angle, the Fed is irrelevant, so let's abolish it.


Quinvarius's picture

Prechter is not very talented.  For him to admit the quantity of money the Fed controls matters is for him to admit that Elliot Wave can not possibly ever predict anything.  So he refuses to admit dumping 2.5 trillion dollars into the economy could in any way inflate the money supply, cause inflation, and thereby throw off the X axis of his little charts.  I get so tired of seeing that guy's nonsense touted as if it has any credibility or he has successfully predicted anything.  Like all Elliot Wavers, Prechter is stuck in a permant "wave 5 just about to crash" mode.  No matter what, his counts always show the market is days from a major crash.  And when it doesn't come?  New count time!  If we get a correction 5 years after he started calling the top?  Well he feels vindicated.

hbjork1's picture

Sounds as though you are getting educated about Gurus.  The better ones stop predicting when they get into a period they don't understand. 

Minion's picture

Prechter & co just changed their wave count on this recent rally because it exceeded the old high.  Elliot wave is not exact and can be moulded to fit a bearish bias.  The mistook the BC sequence off the last leg down as some kind of funky "zigzag" (yes they really referred to it as a "zigzag")

Elliot wave is real and it works, but like any technical method it is only a suggestion......  You can't know that what looks like an ABC countertrend is not just 2 of 5 in a primary trend. 

I'm about to cancel my subscription.  I think their doctrine is a bad influence on an objective mentality.

*Edit - they're also calling for a dollar reversal after two waves down.  Using the actual theory on a monthly chart, this doesn't make sense and also contradicts their (now modified) stance that stocks have a 4th wave pullback and 5th wave rally soon coming.... 

Yikes.  WTF is going on with them?  Even their theory disagrees with them.


Henry Rearden's picture

I learned under George Selgin at the University of Georgia.  I took his economic class on the Theroy of Money.  It was one of the best classes I took while attending my alma matter. 

I remember him preaching about how the Wild Cat banking system wasn't all that bad and those Suffolk people up in Boston did a good job running the show.  Propoganda from the same banking elite we suffer from today coined the term "wild cat" so they could convince the public not to put their money into smaller institutions. 

As far as money is concerned, he has to be one of the top academics in the field today.  He's not your typical economist.  He auctually thinks for himself.

Ripped Chunk's picture


The hammer is in the tool cabinet. Use it on yourself.

palmereldritch's picture

He's not your typical economist.  He auctually thinks for himself.

I thought that was the best bit.  It's on that interpretive tightrope between total incompetence and stealth mockery.

hvl626's picture

We have to appreciate how the Fed receives phenomenal gain from T-securities---and the cost to society.

Let us review how the Fed and Congress create fiat money. Congress grants a T-security to the Fed (asset) and the Fed credits the Treasury’s account (Federal Reserve Notes) as a liability. The checks written by the Treasury on that credit will then be honored by the check clearing procedure of the Fed.

[Granted, this is a vast simplification of the process. The basic accounting by the Fed can be reviewed at 2009 Annual Report to Congress by the Board of Governors from page 448 , and Treasury accounting breakdown is accessible at]

Congress gets to spend the fiat money so created and the Fed holds the security and receives interest. When the security matures, the Treasury must redeem the security. The value of fiat money initially created must then be paid to the Fed and becomes gain.

The Fed has an accelerating option--it can sell the security. Arrangements are made whereby the Treasury acts as auctioneer and Primary Dealers are required to submit bids. Bids may be submitted to the New York Fed or to the Treasury. Upon maturity of the security, the Treasury redeems the security from the holder. The Fed receives the (bid) value of the security upon the sale.

By either of the two methods, the Fed has received the value of the security. The total value of all issued T-securities becomes a gain for the Fed.

The method used by Congress to redeem the security, and the interest incurred, is beyond the scope of this writing. THINK---more T-securities.

Danielvr's picture

You seem unaware that the large majority of the FED's profits go to the treasury.

traderjoe's picture

In our privately-held, fractional reserve banking system all money is created as debt. When a Primary Dealer (or any other bank) purchases a UST, it merely creates the FRN's out of thin air (with a minor consideration for reserve requirements). A private corporation has created money for free, and purchased an interest-bearing security backed by the future productivity of US taxpayers.

This is in direct contravention of how the framers of our country anticipated. The US Treasury has and could again issue money and currency without debt and without interest. The entire process of auctioning Treasury securities is a creation of the Federal Reserve, and enriches both them and their private banking owners.

And while a 'large majority' of the Fed's profits may go to the Treasury - what is the breakdown? How much of the profits accrue to the owners of the Fed district banks (commercial banks) through their statutory dividends? You don't know because the Fed has NEVER been audited.  

nmewn's picture

Well stated Joe.

I believe I read somewhere the districts are guaranteed a 6% risk free return off of this is accomplished these days is another reason to audit the Fed...the imagination could certainly run wild on that "custody chain" ;-)

Max Hunter's picture

You seem unaware that the large majority of the FED's profits go to the treasury.

Really??.. Even though the "large majority" is privately owned?.. Are you really going to try and drop that turd in the punch bowl while no one is looking?... wow

Danielvr's picture

Really??.. Even though the "large majority" is privately owned?..

The FED funds its own operations and out of the remaining profits, it pays a 6% annual dividend to its shareholders, the large commercial banks. All the rest ($45 billion in 2009) goes to the treasury. That's what makes it so attractive for the US government to have the FED buy its bonds - the interest paid doesn't go to China or Europe but returns to the treasury.

Any modern monetary system needs a central bank. People who want to 'abolish the FED' should think twice. What is really needed is reform. Take it out of the bankers' hands, demand that it be audited. Suggestions like 'the only alternative is to give control to some foreign entity' only serve to stifle a much needed discussion among Americans on what kind of central bank they want to have and how they want to control it.

Oh regional Indian's picture

Blah blah blah.

If you look at recent media hype (including here on the hedge and vine), the Fed has been taking a real bashing. Conservatives and liberals alike, clamouring for it's demise. Tea Party, Rand Paul, Ron Paul Heading Senate Banking Committee... woo hoo....

Is the end of the Fed near? Clearly the meme is being released. 

The thing to fear, if you fear at all, is what is the planned replacement? Since we, in general, are in severe decline as a species, I suggest it will be brutal. The Fed will look benign in comparison.

It is inevitable. Chipped/Exploited/Drugged/Fed/Warm or cold and free.

Which will you be?