Wednesday, September 26, 2007

It Depends Why You're Using the Word "Why"

Gabriel M. makes a good point about John Stewart's and Greg Mankiw's question, "Why do we have a Fed?" The answer not only depends (as I argued) on what alternative you have in mind; it also depends on what you mean by "why." The question can mean, "Why is it a good idea to have a Fed?" (Gabriel's answer: it's not. Obviously I disagree.) Or it can mean, "How did it come about that we have a Fed?" Only under a very optimistic view of history are the two questions equivalent. I would personally argue that the reasons given at the time for establishing the Fed were (approximately) valid and remain (approximately) valid today. But even with my relatively sanguine view of quasigovernmental institutions, I have to acknowledge both that the Fed's founders may have had ulterior motives and that the rationale they gave proved quite imperfect in many respects.


UPDATE: In a comment, Gabriel indicates that his answer to "Why is it a good idea to have a Fed?" is not as extreme as I stated above.

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20 Comments:

Blogger Gabriel M. said...

Well, my answer is, actually, a linear combination of "Oh noes! I don't know!" and "Meh...".

Clearly, the best free banking is better than the worst Fed and the best Fed is better than the worst free banking. Beyond this... I don't know.

Wed Sep 26, 02:31:00 PM EDT  
Blogger Robert D Feinman said...

The problem with the Fed is that it was given two incompatible tasks. One was to control inflation and the other was to promote full employment.

This has all the appearances of an agency designed by compromise.

Greenspan and Volcker ignored the employment goal and supported policies to keep inflation down. This, of course, benefits the rentier class. I don't know about Volcker, but Greenspan is certainly in thrall to these people and his obsession with Ayn Rand doesn't help.

I don't know what policy the Fed is trying to pursue at present. There seems to be some indication that they don't know either.

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