Friday, December 11, 2009

Replace the Fed with Congress?

Here, Becker and Posner tell us why hoping that Congress will remove some of the Fed's independence is a really bad idea. I certainly agree with them. Congress has no ability to conduct monetary policy; neither does the Fed.

What Becker and Posner do not discuss is an alternative far superior to keeping the Fed as it is or relying on Congress to make monetary policy. That alternative is to adopt a monetary rule and stick to it. In other words, let us have monetary policy by rule of law, not by rule of men.

Rather novice economics students understand that inflation is everywhere and always a monetary phenomenon, just as Milton Friedman taught us so long ago. Talented economics students also understand that it is the Fed and the banking system that cause credit booms and the inevitable recessions that follow --- all in the name of "stability." What a farce. History is full of empirical evidence about this phenomenon, and Austrian economic theory explains how and why the Fed does it.

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