The Fed

"Market prices can get screwed up when the Fed tinkers with interest rates. Because of the distorted price signals, the actual real resources are invested improperly."

What we need is something else: the establishment of a different kind of monetary system, one that uses competitive markets in the area of money and banking, and that eliminates the currency monopoly of the state.

We should not be fooled into believing that the economy will crumble without high government spending and loose credit organization.

We can understand the reaction today to people calling to "end the Fed."

From the market point of view the Fed is a bankrupt institution.

But prosperity can't be printed. Government edicts won't magically make us better off. Their fatal conceit will only lead us to disaster.

The Federal Reserve was created in 1913 by Morgan men to cartelize the banking system and limit competition. This is fractional reserve banking rather than 100% reserves. Rothbard thinks it is fraud. It increases the money supply in an inflationary manner by creating money out of thin air.

When interest rates drop, entrepreneurs have no reliable way to tell whether, and to what extent, the drop is caused by (A) true increases in the ongoing flow of investable resources or by (B) what amounts to a temporary series of one-time transfers of wealth into the loan market. With such Fed-imposed blindness to the true data of the market, businesses across the whole economy are bound to make malinvestments.

The claim that the innovative capacity of modern capitalistic societies sows the seed of general crises can be refuted, for such cyclical patterns only unfold if new innovations are financed by an expansion of fiduciary money instead of by voluntary savings.

Thus, Mankiw's solution for dealing with unprecedented excess reserves is for the Fed to create even more reserves in order to pay bankers not to make new loans. Does that sound like a good long-term plan for the economy?