You hear a lot of griping regarding Ron Paul's stand on getting rid of the Federal Reserve bank, calling him an out & out loonie for wanting to go back to the gold standard and the stringency of 100-percent-reserve banking. I don't know, honestly, what's best. In a world where central bankers are doing their damnedest to weaken their currencies, simply keeping one's true money-supply constant would send the value of one's currency through the roof. Good thing? Bad thing? I dunno.
But I do know one thing: there are actually several different Fed rates out there, and no-one talks about the important one -- the discount rate. The DR is what's used to reflect the true, instant cost of money. When you make a net-present-value calculation using anything other than the discount rate, you're including some sort of premium (usually a risk or duration adjustment). The Funds rate is a different matter: what rate banks are allowed to lend to each other at. I propose keeping the Fed -- we've already got it, and quarter-annually pandering to the credit markets is certainly better than the banana republic we'd inhabit if we trusted Congress to manage our money supply.
But why should the Fed regulate the inter-bank rate? Why not let our banks decide among themselves at what rate they are willing to loan money? By letting the rate float, then banks can increase or decrease the their rates in real-time according to market pressures, instead of having to wait for the Fed to make its pronouncements. If you want guaranteed borrowing, use the discount window or repos. If you want market-adjusted funding with varying risk spectra, then talk to the other banks. This still ensures that banks aren't destroyed during market panics, but takes "policy" out of an equation that by definition must constantly change.
A credit crisis is a shortfall in the supply of credit, no different than a gasoline crisis or a doughnut crisis, and is almost always the result of price controls. President Carter did untold damage to our economy fixing our gas prices, and Mugabe's nearly destroyed Zimbabwe with his own price controls. We don't want to find ourselves in the same boat with money. If we want to avoid long-term disaster in the credit markets, we need to get out of the price-fixing business and let the day-in/day-out players make their moves according to the daily realities they face.
5 comments:
Apparently Ron Paul was very influenced by this book, which he offered a review on:
G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve (1994) ISBN 0-912986-21-2
I've heard interesting things about this book say...6 months ago on NPR and I think its time to check it out. I have my own wacky theory about money and capital these days but I need to start reading some more to see how off base, or on base, I really am.
Regulation though I think in some form may still be best - on he one hand yes it would be nice to see Market forces drive to what would really be a sustainable discount rate for inter-bank loans, but I suspect instead that you would get collusion especially since so many banks are merging into larger conglomerates which decreases competition.
Collusion wouldn't be a threat here, since this's purely an inter-bank rate, not a customer rate.
We should keep the other regulations, but let the inter-bank market set its own rates. This'll be a purely supply/demand driven thing.
Yes, but wouldn't the banks supposedly compete against each other and then "argue" that because the base interest rate on inter-bank loans was x% they therefore had to charge x + y% to pass costs along to consumers?
However, if the banks really do compete against one another then the ones who manage their money smartly will be the ones who can afford to make lower interest interbank loans to take away business from their competition.
No, it's entirely different.
Collusion is a problem where you have a population of providers who are selling to a separate population of consumers. Banks are both providers and consumers of short-term credit, depending on the very short-run needs of their treasury departments. One day when BOFA has extra cash on hand they're a net seller; the next day when they're going to have a shortfall they're a new buyer.
But that's assuming a fixed rate... With a variable rate, then relative to their other assets and commitments they're a new buyer or seller based on where the price goes.
But at no point is a bank a pure consumer at the inter-bank rate, and at no point is the consumer ever borrowing at that rate without it being a loss to the bank.
As to their arguments above, that's already the way banking is done, plus a bunch of other z's, p's, q's, etc. Those funding formulae are part of the secret-sauce that banks use to compete against each other, with banks driving as close to ruin as they're comfortable without feeling like they'll tip over the edge.
Believe me: never assume a bank operates honestly or in your interest. No sane banking policy would assume banks are acting for the any good, much less a greater one.
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