This archived content originally appeared at, the predecessor site to, and does not carry the sponsorship of the Cato Institute.

L-Street: The Movie

For those who prefer a brief summary, or just like watching stuff on their computer, here is the video of my November Cato Monetary Conference presentation.

  • Paul Marks

    It is a good point that some people who favoured creating a Federal Reserve wished it to be forbidden to deal in government debt – of course they lost the struggle (traditionally dealing in government debt, making it less difficult for govenments to borrow, is the purpose of creating a Central Bank).

    It is alo a good point that some banks (the 21) get special treatment. And it does partly explain why New York City (objectively speaking one of the worst places in the United States to have a busines – in terms of taxes, regulation and so on) is still the Financial Centre.

    The big banks were based there when the Federal Reserve was founded in 1913 (and New York City and the Empire State were a very different place then), and so have stayed – getting their funny money from the New York Fed (much like the millions of people who crowd into vile third world capitals like Cairo – in order to be physically close to the government and its handouts).

    However, your conclusions…….

    Instead of just saying the Fed should be forbidden to buy government debt (which is, I agree, fundementally worthless) – you say it should be able to buy lots of other stuff (I am using a polite word here). Of course, as you say, it de facto does this by its "Discount Window" (in which all sorts of "stuff" can be taken as collateral) and by the various other scams the Fed came up with when some banks showed fear of being seen lineing up at the dole office of the Discount Window (by the way replacing the arbitrary antics of the Fed with "fixed rules" does not deal with the basic problem – that being the principle of corporate welfare).

    And instead of saying that these 21 banks should be forbidden to engage in Fed "auctions" (by the act of ending these "auctions" once and for all) you suggest that all banks be allowed to engage in them.

    To take the European Central Bank (the institution that gave European banks a 485 billion Euro Christmas present, and has engaged in all sorts of other antics) as a guide, is mistaken.

    By the way much of what the ECB does is illegal under the rules by which it was set up – but governments (and government backed entities) seem imune from the rule of law (certainly the E.U. is – it has many thousands of "laws", but no rule-of-law, and the United States is, sadly, the same).

    And "fixed rules" you set up for the Federal Reserve (or for the "computer" you suggest) would go the same way as the fixed rules that were supposed to control the ECB.

    And to cite Walter Bagehot…….

    History has shown what economic logic (and even the then Governor of the Bank of England) argued was correct – Bagehot was opening the door to endless absurdities. Certainly, in his own mind, he was only opening the door a tiny crack (banks would have to have "good collateral" and blah, blah, blah, to get their corporate welfare….), but once opened the door to this road leads, step by step, to the present crises and on to future ruin.

    By the way Bagehot also opened the door to the Welfare State – by his doctrine that all demands that it was "safe to concede" to, should be conceded to (many years ago I came to the conclusion that Walter Baghot would not have recognised a principle, in poliics as well as economics, even if he had tripped over one).

    Anyway at the heart of the talk there appears to be a basic mistake……

    That the money supply needs to be increased – and that all economic debate should be about HOW it is to be increased (should there be "auctions" or whatever….).

    The money supply does not need to be increased – the assumption under the talk is just wrong.

    On the historical point of a National Bank versus State "pet" banks.

    As you know Martin Van Buren dealt with that matter – one does NEITHER.

    Government money should not go into banks at all.

    Taxes (paid in whatever commodity is used as money) should go into an independent Treasuary – and money should be paid out of the Treasury as required.

    A horse and buggy system of finance.

    Indeed a strongbox-from-the-middle-ages system of finance.

    But experience has shown it is the best system for a government to follow.

    Of course any existing credit bubble will be liquidated by the above – which did indeed cause short term pain.

    Sadly the modern credit bubble is vastly bigger – indeed the modern economy is utterly dominated by the bubble. Every aspect of the economy, indeed of society, is utterly twisted and distored. For example, social mobility has been undermined and a "finance economy" class of super rich (whose wealth is NOT from actually producing anything) of almost Latin American proportions has been created (the United States is heading towards a Third World situation – as is much of the rest of the West).

    Cutting out this cancer may well kill the economy (I do not deny that) – but something so riddled with cancer is going to die anyway.

    • George Selgin

      Paul, your "riff" about the money supply never having to increase is getting very tiresome. You make it sound so very easy! Shut the Fed down tomorrow (which is what your advice amounts to), and all will be just dandy. Have the government keep its own funds in cash, not deposits, revert to strongboxes, etc., etc. I hate the Fed as much as anyone, and want it to go away, but alas, no: it isn't so simple as saying, in effect, "why don't we revert to the monetary system of the middle ages"!

      And leave Walter Bagehot alone.

  • Paul Marks

    "and all will be just Dandy" – alas George, you have never read a single comment I have ever written if you think I believe just that.

    On the contrary – I think that the times that are comming (even if the Federal Reserve is closed tomorrow) will make the Great Depression look like a picnic.

    As for the political chances of closing the Fed tomorrow – the chances are nil, as the political situtation of the United States is utterly corrupt (as it is in Britain….).

    However, this same fact (the fact that the political situation is utterly corrupt) also makes your proposals politically impossible (as they would not directly benefit key players – indeed they would harm them greatly).

    Nor would your proposals prevent the times that are to come.

    That breakdown is already "baked into the cake" by actions that have already taken place.

  • danieldbunn

    I would love to see you debate Perry Mehrling.

  • RickDiMare

    George, I thought the presentation was clear and well delivered.

    But listening to you at CATO, and prior to that, to the Richmond Fed's president, I thought of something Ben Dyson from Positive Money said in a recent clip, something like, "Everyone seems to have forgotten that the coin was the money."

  • David Stinson

    Hi George.

    Interesting talk.

    Is there a link to the paper? Or will that show up in the Cato Journal?

    I come from the telecom regulatory world and I have always been struck by how little attention appears to be paid (even if only in the form of lip service) to competitive neutrality in the Fed's operations.

    Further to your talk, is there any sense in which the current restricted arrangement involving primary dealers has become, through barriers to entry or privileged access to Fed funds, a means for the Fed to achieve an apparent "market" outcome (in, for example, an auction) that would not be achievable in (truly open) "open market operations" of the type you propose?

    • George Selgin

      David, the paper can be seen in roughly its final form here. In it you will find some evidence suggesting that the answer to your last question is, "yes."

      • David Stinson

        Thanks George for the link and the response. I figured the answer would be "yes".