Fed Reform Now! Again!

Clean up the bordello but don't hurt its business...

IT'S a common refrain in certain economic circles, says Brian Maher in The Daily Reckoning.

"We need to reform the Federal Reserve."

We are told this should be done or that should be done.

This will make it more efficient, that will make it more transparent.

And perhaps even it would.

Yet we take a dim view of most "reform". The reason is simple as Sam and clear as gin.

Reform is an ax that rarely strikes the root. That is often by design.

It is designed to deliver a glancing blow – to leave the root largely unhacked.

That is because too many interested parties draw sap from the root.

It is the very source of their prosperity.

Authentic reform would shatter the root – and the sustenance it offers a selected few.

H.L.Mencken labeled reform "mainly a conspiracy of prehensile charlatans to mulct the American taxpayer."

We believe he was correct.

The late libertarian Frank Chodorov said most reform aspires to "clean up the whorehouse [while] keeping the business intact."

For a more fitting analogy we seek in vain.

We file only this one caveat:

The whorehouse – for all its sin – at least does an honest trade.

A fellow emerges from this den of carnality somewhat lighter in the wallet, it is true. Yet he also emerges somewhat lighter in spirits.

He has gotten value for money.

Can the same be said for the Federal Reserve?

Its very business is false.

It manipulates interest rates that send false signals to markets.

It inflates bubble after bubble. What is a bubble but a monstrous falsehood?

Yet even most "reformers" – there are exceptions – accept the Federal Reserve's central role.

That is the distortion and manipulation of interest rates.

To these reformers it is a fact as elemental as gravity...or the ebbing and flowing of the tides...or the imbecility of a congressman of the United States.

Eliminating that role is the one reform they will not consider.

Is it true reform you seek? In the spirit of benevolence so characteristic of us...here we propose our own modest reform:

The Federal Reserve ceases all manipulation of interest rates and influence upon the same.

That is, that the Federal Reserve ceases distorting the price of credit.

That is, that the Federal Reserve ceases distorting the price of time itself.

You say our reform is less reform than abolition – that our implement of reform is a wrecking ball rather than a chisel.

Perhaps you are correct. Very few would agree to it. Let us then propose a reform far more modest:

• Restore the Federal Reserve's original purpose of providing liquidity to otherwise solvent banks in event of financial crisis.
• Strike from its statute the twin mandates of "price stability" and "full employment."

There you have a reasonable reform...at least by our liver and lights.

The Federal Reserve would work far less mischief if implemented.

Yet if it is ultimate reform you seek, this we suggest in seven short words:

"The Federal Reserve Act is hereby repealed."

That is, reform the entire business off the Earth.

This – incidentally – is within the lawful power of the Congress of the United States.

No more setting, influencing or in any way bullying short-term interest rates, long-term interest rates, intermediate interest rates or any other interest rates.

Let the market find its own level – high, low, all platforms in between.

Turn the credit business over to borrowers and lenders on the free market...as the prices of automobiles, computers, chewing gum, floor mops and catcher's mitts are turned over to the free market.

Let the devil take the hindmost.

Will there be losers? Of course there will be losers – but does not the current arrangement yield its losers?

There will also be winners. And likely among them will be many of today's losers who the present arrangement disfavors.

Most importantly, it would wring the wild excesses from the financial system.

The booms would not thunder nearly as loudly – or for nearly as long.

Yet nor would the busts.

Thus you have our simple proposal of reform. We offer it today in the highest spirit of public service.

It will be enacted the instant Hell is an ice sheet.