The CATO Institute Finds That The Fed Must Be Abolished

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)

WorkingPaper -

Comments

[Fraud-Esq]

Absolutely no intervention? How would that look? Different bank bills in circulation? No FDIC insurance at all. While perhaps ideal to create smart consumers of money, the complexity would be enormous and that cost alone (and instability, fear of deposit, etc) is a long bridge back hundreds of years. 

Instead, we need to monetize the power this nation built since WWII with a single Greenback assisted by a Federal Reserve-like Act which makes it clear what the Congress can and cannot do regarding the creation of money to take on debt. 

I can also envision Labor bills, treated as currency, paid to the persistently unemployed in crisis times, like today, FOR WORK. Money is a tool that can be used by a sovereign to change incentives and fix emergencies that threaten social fabric. So, use it. Don't go to the banks who just proved they'll destroy their country for profit. Labor-bills also beats sending out stimulus checks to consumers to buy Japanese TV's and paying private interest to the elite bankers. Bush's stimulus probably raised EM economies and we paid interest to our enemies to do it. That's an embarrassment which bothered Lincoln but is lost on our hapless modern leaders.  

You make banks utilities or you go Greenback, but CATO isn't with THAT. If the elite int'l bankers crush the Fed, it's because they know the Fed is the only intermediary that controls the reserve currency that can co-opt banks into a Petro-dollar for America populism campaign which may develop as a result of QE2. That scares them. They're freaking because the FED just went near-Greenback. Out of desperation? With other motive? Persistently low interest rates, while they're not lending anyway, consumer credit topped out, and markets may be topped out doesn't help the rich. It makes them ground zero build and be productive and take real risks. This doesn't fit their world domination, buy treasuries, and play golf meme.

And now THEIR currency monopoly is being used to help America's fiscal taxpayers? Shit. Those who hold the most money in the world may go ballistic. The FED is affecting them all, no escape. That's the benefits of winning all those wars. They want endless piggybacking and free lunches. Fuck them. Let's buy our debt while they de-leverage, thus escaping inflation, and getting our own earned lunch for making the world's sea lanes safe for 70 years.    

[sub Z]

Maybe you can print them in the garage, I trust you… what kind of question is that? All the problems you are talking about are a result of government intervention and human nature. Dealing with symptoms is not the solution. The government has its role, which it is not doing and is making things worse. I respect everyone's opinion but look at the results.

For nearly a half-century the United States and the rest of the world have experienced an unprecedented continuous and severe inflation. The dollar has lost 96% of its purchasing power since the Fed has been in business. The US monetary system is in fact entirely backed-by debt. Dollars are not actually assets, they are debt-backed instruments produced by the Federal Reserve. Central bankers cannot be trusted with the printing press, especially when there is no formal check on their inflationary policies.  In a truly free market, fiat money would never come into existence. Governments can not create something "as good as gold" So far this has been the best fiat system to date but a government mandated fiat currency simply does not work in the long run.

The US Does Not Own Or Control Its Money System

http://www.zerohedge.com/article/us-does-not-own-or-control-its-money-sy...

What the American public needs to hear is that regulation is the problem and that the “unfettered market” is the only way to break out of the business cycle. All that is required is a gold coin system of money and for the rule of law to be applied to banking whereby demand deposits are held as reserves in the bank. The economics of gold would regulate the money supply and the interest rate would regulate the amount of demand and time deposits as well as borrowing and lending. No government regulation is required. There is no systemic or macroeconomic risk and the market eliminates the business cycle.

The State's coercive interference in either money or banking, including its licensing of a monopolistic central bank, reduces all men's freedom and most men's wealth.

As stated in its own 1994 publication, “The Federal Reserve System: Purpose and Functions,” the first duty of the Fed is “conducting the nation’s monetary policy by influencing the money and credit conditions in the economy in pursuit of full employment and stable prices.” "The Fed can produce new money, but it cannot produce new jobs. Fiscal policy — and its threat of overtaxing, over-regulating, and overspending — is what’s ailing the economy."

The solution is for the government to move out and not intervene in the economy. Let free markets work.

"Deposit Insurance"

But even with the backing of the Fed, fractional reserve banking proved shaky, and so the New Deal, in 1933, added the lie of "bank deposit insurance," using the benign word "insurance" to mask an arrant hoax. When the savings and loan system went down the tubes in the late 1980s, the "deposit insurance" of the federal FSLIC [Federal Savings and Loan Insurance Corporation] was unmasked as sheer fraud. The "insurance" was simply the smoke-and-mirrors term for the unbacked name of the federal government. The poor taxpayers finally bailed out the S&Ls, but now we are left with the formerly sainted FDIC [Federal Deposit Insurance Corporation], for commercial banks, which is now increasingly seen to be shaky, since the FDIC itself has less than one percent of the huge number of deposits it "insures."

The very idea of "deposit insurance" is a swindle; how does one insure an institution (fractional reserve banking) that is inherently insolvent, and which will fall apart whenever the public finally understands the swindle? Suppose that, tomorrow, the American public suddenly became aware of the banking swindle, and went to the banks tomorrow morning, and, in unison, demanded cash. What would happen? The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do, and this would be in their power, would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation.

Central banks are unnecessary and harmful. It is both possible and desirable to eliminate them. Some of their functions could be handled by the market institutions such as the clearing house function. Setting interest rates could and should be done by the market. Persistent and erratic inflation of the money supply is not desirable so that the function would be eliminated and control of the money supply would be returned to the market in the form of gold and silver mining production which is very consistent and difficult to manipulated because it takes “real money” to mine precious metals.

A gold standard is the most important part of the solution because it ties government’s hands from deficit spending and inflation. However, fractional reserve banking is also a big contributor to the problem of monetary instability, inflation and the business cycle. We need to abolish fractional reserve banking on demand deposits and return to laws pertaining to deposits and warehousing that existed prior to central banking and indeed continue to exist today in all other warehousing contracts. This would mean that every dollar deposited into a demand deposit account would have to be maintained on reserve by the bank. There would be no reserve requirements for bond proceeds, CDs or other time deposits. This would take the leverage and instability out of the monetary system.

The Treasury and the Fed should not be permitted to issue paper dollars, only gold and silver coins, and private mints should also be able to issue gold and silver coins so that the money supply is market determined (and that the ratio of precious metals in monetary use and other uses would be in harmony). We should have a coin-based system, not a gold-exchange system that allows the Treasure to “fudge” with the money supply. The dollar should be fixed in a weight of silver because that is what emerged on the market (true gold was used as money in large transactions, but we only went on a gold standard because the British made bad monetary decisions when they were on a fixed ratio of gold to silver and Gresham’s Law went into effect). There should be no fixed ratio of gold to silver, but people should be free to use both as money. Checks and debit cards would still exist and indeed debit cards could automatically translate gold demand deposits into silver-denominated purchases. These basic tenents should be written into all Constitutions to block the actions of government, but not to forestall innovations of the market.

[chrisina]

if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise

Who do you think issued more than 95% of the $52 trillion in credit money outsdanding? Private entreprise. And the rest was issued by the Fed, which also responds to a group of private shareholders. Not the government.

"If the American people ever allow PRIVATE banks to control the issue of their currency, first by inflation, then by deflation, the banks will deprive The People of all property until their children wake-up HOMELESS on the continent their fathers conquered.  The issuing power should be taken from the banks and restored to The People, to whom it properly belongs". --- Thomas Jefferson

Our problem is exactly that, a small clique of private shareholders were granted the right (and the benefits that go with it) of issuing as much credit money as they see fit and can pile on the American people, either directly, or via its government. The American people and its government have simply become slaves of this small clique of PRIVATE bankers.

More freedom for the small clique of international private bankers = less freedom for the American people

[sub Z]

That's pure fallacy from beginning to end. As a result of government intervention. How many went to jail? One hand washes the other. If you are referring to a Keynesian system, yes there is a lot of problems with it, it doesn't work.  A proper banking system would not allow that and the government still has the role it is required to do. See my recently posted comments above. It is right now that you and everyone else is being scammed in the ultimate way. It needs to stop, they are making things worse.

[Fraud-Esq]

Who do you think issued more than 95% of the $52 trillion in credit money outsdanding? 

agreed!  Same is true of German inflation, the Reichsbank was doing the same thing and shorting their own currency, just like Greece was caught doing recently. 

Keep your eye on the privates! If we can't coin our own money, as the constitution dictates, and regulate private involvement in money changing - we're cooked. We need a priesthood of the currency, in the government. Force Blankfein and his ilk to WORK, to PRODUCTIVITY, instead of SPECULATION.

If we had "private currency" today in the plural, our front pages would be filled with stories of great battles between private printers. It would be a sickening waste of time and America's productivity. 

[sub Z]

All these things being mentioned here only strengthen the case. Either people are not reading or not understanding the material and do not understand how the banking system works or the role of the government (how it operates, what it can and cannot do) and how it takes our freedom away. Ask for an opinion and if a know it all pops up they will carry on and on about something they do not understand. Like talking to a stone. It's easy to tell all the bumblers on a blog by the frequency and content of their endless drivel. Take a quick look at those on here who have to correct everyone else because they are the guru on all matters.

People are saying they want freedom and stand for the Constitution, look out for the distraction (apparently not understanding what I was saying about worse things than the Fed way up at the very first post), and then the solution is to give that freedom back to the government, the whole reason we are facing these very problems. Is the government interested in our freedom or their power? The Fraud Started At the Very Top: With Government Leaders. I simply do not see anyone in our government who belongs in the positions they are in and these are the people the citizens run to to fix all the problems, the same problems they created in the first place. Things go from bad to worse. The issues stemming from a multitude of government failings are also being lumped together and blamed on the wrong thing. I don't think that is what people are intending and I do believe we are all on the same side.

[palmereldritch]

"apparently no one bothers to read because they know everything...

talking loud, saying nothing."

LOL. I can't tell who you are responding to (a tactical choice on your part perhaps?...you might want to be more precise in your responses) but as I am part of this sub-thread I will respond to this statement:

Personally, I know very little and am always willing to learn but I do know that I don't like the simplicity of the equation in your first sentence and corrected it accordingly. I stand by that correction

Unlike you and your statement above I presume nothing.

End the FED. No global government. No global currency. There is an equivalence of evil here from the same architects. None is better or worse.

That was my point.

[blindman]

there are better things and worse things.  and they

are both potentially infinite.  or just because there

are worse alternatives does not improve your current circumstance.

[sub Z]

I revised that. Yes, that is a good point.

[Croesus]

The ONLY way the FED will be abolished, is under the guise of trusting an International Bank, such as the World Bank to managing our economy, and the economies of other nations.

It will involve Obama (or whoever is in after him), ceding more of our rights "in the name of globalization". It will then involve the issuance of a completely new set of pretty "Monopoly Money" for us to use, or a debit system.

Obama, just like Bush, just like Clinton, just like Daddy-Bush were/are ALL in favor of "one group controlling the world" - That should tell you a lot, about "whose interests are really being represented".

As is the usual trick, "The Solution to the Problem" will be for Americans (and other people in the world) to give up more Freedom, and more Rights, in favor of greater concentration of power in the hands of a more centralized system. 

The governments of the world are largely the textbook-definition of managerial ineptitude, gross negligence, and corruption. It is no secret to anyone living in most parts of the world; So why in the hell would anyone trust a damn thing they say, when everybody knows that "actions speak louder than words"?

What people should know, is this: "Appearance, and Reality, are OPPOSITES". It's misdirection; What the Eyes see, and Ears hear, the Mind believes.

Take ANY "hot topic" political issue, and take the "operating word" in the "catch-phrase": Change it to the Opposite, and you have a clearer picture of what's really happening, or at least what the end results will be.

The only safe assumption, is that whenever Washington says something is a "Good Idea", you can bet your asses that it's probably NOT going to be GOOD for YOU.

If you agree with this post, share it.

[w]

TD, thanks for posting this.

I think this is paper could be a momentous milestone. The Cato Institue is the 'US Establishment'. Just look at Institutional Support page of the latest annual report if you need confirmation.

The establishment has been the greatest beneficiary of the Fed's policy since its inception.

The long term implications that immediately spring to mind are as follows:

1. They know that the cat's out of the bag re. the Fed's inflationary policy and that these can't work now that almost everyone knows about it. Their assessment must be that confidence in the Fed, and by implication the USD, is irremediably lost (it's only a question of time).

2. The Fed is dead.

3. Long live the Fed.

The Federal system's dual purpose (the real ones that were achieved successfully) is to finance governments' deficits (that is not going to change) and to facilitate the work of it's members (the bankers) by inflating the economy on a persistent basis without people knowing about it. Whatever replaces the Fed will be a similar entity, the aim being to hoodwink people into trusting the currency again ('it will be different this time').

4. The next few years, decades are going to be challenging and most interesting to navigate. One could imagine that now that the Fed's fate is sealed, it can do anything it needs to without fear for it's reputation: imagine that!

5. The USA could be considerably harmed by this. It has two major opponents that are hyperactive in trying to destroy 'brand USA' and as a consequence those of it's major corporations (just watch RT to see the kind of guerrilla propaganda that is broadcast and its spread throughout the Web by frustrated citizens).

My twopence, thanks again for posting this.

w

[anarkst]

“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).

EVERY major institution has an abysmal record of performance, BY DEFINITION!!

[msjimmied]

Cato Institute...the Koch Brothers, the Kings of deregulation funding, but maybe in this particular instance I'll go with that. The missing piece is, what do we do when we have demolished the old system? The one who has the plans and the impetus wins. I don't hear of what follows...that is the danger. Charting the road map to a new paradigm is a bitch. Who has the courage in the cartel fixated on kicking the can down the road? Who has the balls and the integrity that we will trust? NO ONE.

[Ignore Amos]

Find it interesting the number of people calling the Cato Institute a neocon group.  I haven't heard too many neocons arguing for legalizing drugs, expanding immigration quotas and being consistently against the war in Iraq.  Maybe I need to turn up the ol' hearing aid...

http://www.sourcewatch.org/index.php?title=Cato_Institute

[Problem Is]

Has The Fed Been a Failure? -- Yes --
Bernanke's balls may be headed for a date with Max Keiser's Golden Nut Crackers...

[blindman]

http://www.youtube.com/watch?v=sDkhzHQO7jY&feature=related

.

George Carlin - We Like War

[Fraud-Esq]

Has anyone studied the German monetary system between 1935-40? 

How did they have this massive turnaround? 

I've read a little about it, not too much. But - from what I've read, it's standard progressive stuff against international banking. A mix of left wing and right. work = money concepts. 

If I knew for every NEW U.S. dollar that was Greenbacked into the system, my country received one dollar of VALUE/WORK from it, I'd feel better. With welfare, which I tend to favor, especially now, it's just MONEY out the door, INTEREST paid to private banks. I don't like that. Who does? If these unemployed WORKED and served the nation by building infrastructure, were paid that same GREENBACK (no interest to a private bank), isn't the USA making it THRICE? Paying 1) no interest and 2) getting work in return and 3) lowering unemployment?

I don't get it. Is this a radical idea or something? haha

[robertocarlos]

+1 A new Greenback issued by Congress.

[liberal sodomy]

Hitler's Monetary System
7-14-7

 

"We were not foolish enough to try to make a currency coverage of gold of which we had none, but for every mark that was issued we required the equivalent of a mark's worth of work done or goods produced. . . .we laugh at the time our national financiers held the view that the value of a currency is regulated by the gold and securities lying in the vaults of a state bank."  -Adolf Hitler, 1937 (CC Veith, Citadels of Chaos, Meador, 1949.)  

 

 

"And it proved sound. It worked. In less than ten years Germany became easily the most powerful state in Europe. It worked so magically and magnificently that it sounded the death knell of the entire (Zionist) Jewish money system. World Jewry knew that they had to destroy Hitler's system, by whatever means might prove necessary, or their own [system of usury] would necessarily die.   And if it died, with it must die their dream and their hope of making themselves masters of the world. The primary issue over which World War II was fought was to determine which money system was to survive. At bottom it was not a war between Germany and the so-called allies. Primarily it was war to the death between Germany and  the International Money Power." --William Gayley Simpson, 'Which Way Western Man' (p.642)

[blindman]

http://www.bloomberg.com/video/64530528/

.this goes with this..

http://www.reuters.com/article/idUSLDE6AD0EJ20101114

.

hmmmm

[gwar5]

So Ron Paul isn't crazy then, huh?

When the Fed became the economic central planner 15-20 years ago

the real crazy train started going off the rails. Who gave them that authority?

Answer: no one.

[Fraud-Esq]

If Ron Paul wanted to regulate private banks, I'd give him a big kiss. RP is always half right and on the way to his dream, he's unwilling to support Bill Black. That I can't abide, but I appreciate his voice for what it's worth. 

When you're unwilling to regulate banks on the way to your dream of eliminating the Fed, that's too dogmatic. 

[Fraud-Esq]

Bush could have issued Greenbacks in his consumer stimulus check helicopter drop too. But, instead, he gave us checks borrowed from banks (interest due later). We took the checks and bought Samsung flatscreen TV's. Emerging economies and the bank cartel benefited. We lost any way you slice it.

This must end. 

If QE2 doesn't produce the quantity theory inflation that big bankers are mocking it will (like they did the Greenback), then the Jefferson-Jackson crew will have their first precedent to argue taking it to the next level.

A nation doesn't need to pay interest to the bank cartel on public debt, unless you believe the bank cartel is the true sovereign of people. They will scare you any way they can to keep you and your nation in debt paying interest. How do you think 10 generations of excessively wealthy families are always able to maintain their wealth without being productive. They don't even have to THINK, as long as your nation is willing to pay them interest.

If we're able to stop paying interest on new national debt while the petrodollar is still a necessary currency, the ultra-rich will have to get to work chasing lower yields or BEING PRODUCTIVE (!!) with their reserves, as was intended. No more dialing in a safe investment on the gorging US Gov while playing golf. Then, we'll be voting for people who keep good goods instead of everyone getting a crash course on the FED every depression....

[honestann]

Of course the Fed must end.

But no "new system" can work either if it allows fractional reserve banking, or fractional reserve anything.  The only kind of system that is honest and ethical is a system that contains ZERO [official or unofficial] stand-ins for wealth.  No paper money.  No receipts for gold, silver, etc.

The "value chain" between real, physical goods produced by individuals must never be broken.  This is the simplest possible system, and also the only system that works.  Every other system is inherently fraud.

This is all very simple, which is probably why most folks today cannot believe it works.  Somehow, people have come to believe only complex and non-transparent systems work... those systems that the creators of real, physical wealth cannot see inside of, or prevent theft by the predators-that-be.

The entire system is this:

#1:  humans produce real, physical goods.

#2:  humans exchange real, physical goods for other real, physical goods.

That is ALL.

Now, the only hyper-trivial "complexity" that we must add is to adopt some single "value standard" so we can compute how much of good A is appropriate to trade for good B.  That "value standard" is 1 gram of gold.

Now, if we (and our pet chickens) produce eggs, we can easily compute how many eggs we must trade to get any specific quantity of lumber, or nails, or nickel, or copper, or ceramic tiles... or anything else.  We simply note how many grams of gold the sellers want for their goods, then note how many grams of gold buyers are willing to pay for our eggs.  Calculation complete.

This also makes gold a convenient way to "save wealth".  For example, if we always sell our eggs for "grams of gold", we can keep that gold in a well hidden can somewhere until we have enough to buy whatever products we want and need.  This way our eggs don't rot and become worthless - we can sell our eggs when they are freshest and thus most valuable.

This also means, we are free to save our wealth in any form we wish.  We could sell our eggs for gold, then convert the gold into ingots of copper, and save our wealth in that form.  Or we could choose any other real, physical good to save our wealth in, as long as it did not degrade in the time-frame we decide to save.

Which means, the "gold standard" really only means two things:

#1:  real goods only - no fiat, no fake, no fraud, no fiction, no fantasy.
#2:  compute values of real goods in terms of "1 gram of gold" units.

What we absolute must avoid, to ever realize an honest economic system, is substituting paper stand-ins/receipts/currency/ledger-or-computer-entries for gold (or other real goods), and fractional-reserve-practices of any kind.  Of course, if no fiat/fake/fraud alternatives to real physical goods exists, fractional reserve practices are impossible.

All it takes to solve all problems in the world economy is trivially simple.

Get real, and stay real.  Period.

The ganster banksters will never accept this.  Therefore, the only way to achieve this is to take the simple actions ourselves.  Only accept gold for the real products we produce.  Always exchange our gold for the real products others produce.  And that's it: economic nirvana.

[oldmanagain]

Cato is a Koch ( facist) sponsored propaganda outlet.

`

[reinhardt]

The CFTC is the phony institution that should be abolished.

http://www.enterprisecorruption.com/

Happy Holidays:-)

r

[functionform]

The actions of the Fed cannot be taken out of context.  The main failure must be placed firmly on both political parties, who promise and deliver free everything for nothing.   Free money for wars, free money for houses, free money for cars, free money for re-electing yours truly.

The Fed is just a real easy bad guy, but what can you do when the legislative branch has already put us in way too deep.

[bernorange]

One of the authors of that paper - Lawrence White - also wrote a CATO paper about the Gold Standard some time back:

http://www.cato.org/pub_display.php?pub_id=9181

[Monk]

This is another problem given the amount of gold available worldwide. I think there is only around one troy oz. available per capita for the global population.

[Monk]

Most of money supply worldwide doesn't come from the Fed and central banks but from commercial banks extending credit, and it comes in the form of unregulated derivatives.

Also, governments in general work for commercial banks which work with other corporations. Other corporations earn by dealing with banks and investing in unregulated derivatives.

Finally, the goal of commercial banks and other members of big business is to earn more profits by encouraging each other, government, and citizens to borrow more more money. Government and citizens want to borrow more money so they can spend more of it. Government can use it on salaries, services, and even the military, which makes corporations (esp. the defense industry) and citizens (who avail of services) happy. And citizens use the money to buy all sorts of goodies to be part of the middle class and to make investments so that the returns can allow them to retire early.

Thus, the problem isn't just the Fed but the free market capitalist system itself, which requires increasing money supply to support more production and consumption of goods, leading to more profits for big business. And it will not fall apart easily because big business, governments that serve it, and citizens who rely on both for financial and physical security need it. It wil fall apart because inevitably more credit crunches will take place, followed by peak oil.

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