This explains one major flaw in monetary policy. There is no criterion for applying. The Fed has experimented with a rule and failed. The present policy is discretionary. The board member disagree over the most basic issue, whether to raise or lower rates. There might be legitimate debate over how much to raise or lower based on expectations. But when there is no objective way to decide whether to increase or decrease rates, thereby picking winners and losers, it's insane rather than scientific.
It supports Hayek's argument in favor of the information processing power of markets over command systems, especially in highly complex areas where functions cannot be written reliably. NAIRU has been a failure.
The Fed should set the rate to zero permanently and issue securities at a fixed rate based on demand, and let the market set price. Fiscal policy is ample to manage government economic policy through injection and withdrawal.
Operational requirements should also reflect that fiscal injection through spending is funded by issuance alone, and that fiscal withdrawal through taxes, tariffs, fees and fines is dual-purpose, controlling for inflation and discouraging socially negative behavior.
Reuters
To cut or not? Dueling Fed views boost pressure on Powell
Howard Schneider, Ann Saphir
James Dorn echoes John Taylor.
James Dorn echoes John Taylor.
So we make up some rule to preserve central bank independence? Been tried and failed.
There is no rule that remotely scientific in the sense of a formal model that passes the empirical test.
John Dorn admits it and suggests a committee to find one:
The problem is how to induce the Fed to trade off its discretionary powers and adopt a monetary rule that will decrease the uncertainty that now plagues the present system. Congress has the authority to make the Fed accountable for following a rule, but thus far has not been able to even commence a national monetary commission to evaluate the Fed’s performance and recommend reforms.
This is a critical first step. Until then, it is imperative that we continue to examine alternative monetary rules so that, when the time is ripe, an effective rule-based monetary regime can be adopted to limit the power of the central bank, insulate it against political opportunism, and safeguard citizens’ right to sound money....
Really.
Why the Fed Needs a Monetary Rule to Protect Its Independence
James Dorn
Nice to see agreement with the MMT "permanent zero interest rate" idea (first advocated far as I know by Warren Mosler in his paper "The Natural Rate of Interest is Zero" published in 2004. However the authors say "The Fed should set the rate to zero permanently and issue securities at a fixed rate based on demand, and let the market set price."
ReplyDeleteIf there's no reward to be had from locking up your money in a bond, what's the point in doing so: i.e. why would there be any sort of price for zero rate bonds??
Maybe there'd be some sort of market in that that there's always a possibility that a central bank goes for NEGATIVE rates some time in the future, in which case zero rate bonds could be sold at a profit.
But when there is no objective way to decide whether to increase or decrease rates, thereby picking winners and losers, it's insane rather than scientific. Tom Hickey
ReplyDeleteIt's insane because it's not government's (or its Central Bank's) duty to pick winners or losers but to promote justice.
And justice cannot possibly include limiting the use of a Nation's fiat to a government-privileged usury cartel.
Instead, all citizens should have inherently risk-free debit/checking accounts at the Central Bank itself and all other privileges for depository institutions, including deposit insurance, ABOLISHED in a responsible manner.
As for interest rates, equal fiat distributions to all citizens (a Citizen's Dividend) is an ethical way to lower them rather than have the Central Bank create fiat for special interests such as depository institutions and, by extension, for the rich, the most so-called "worthy" of what is currently, due to government privilege, the PUBLIC'S CREDIT but for private gain.
ReplyDeleteThe Fed should set the rate to zero permanently ... Tom Hickey
ReplyDeleteThis is entirely corrupt since it entails fiat creation for private interests, i.e. for the banks. Instead, banks should have to honestly borrow fiat from the non-bank private sector and from each other. And if interest rates should be too high, then the ethical way to lower them is equal fiat distributions to all citizens.
and issue securities at a fixed rate based on demand, and let the market set price. ibid
This is OK only if the starting bid is ZERO percent MINUS operating costs - otherwise it is welfare proportional to account balance since account balances at the Central Bank are inherently risk-free.
Fiscal policy is ample to manage government economic policy through injection and withdrawal.
Operational requirements should also reflect that fiscal injection through spending is funded by issuance alone, and that fiscal withdrawal through taxes, tariffs, fees and fines is dual-purpose, controlling for inflation and discouraging socially negative behavior. ibid [bold added]
The use of taxes for inflation control MUST fall on the non-rich since the rich don't consume enough to matter. Moreover, it is unlikely that tax rates shall ever be so high as to reign in the consumption of the rich.
Instead, price inflation should be controlled/ameliorated by:
1) Allowing all citizens to use fiat - thereby increasing the DEMAND for fiat.
2) Abolishing all fiat creation except for the general welfare (including an equal Citizen's Dividend to all citizens).
3) Abolishing all other privileges for the banks since these increase the DEMAND for bank deposits at the expense of DEMAND for the Nation's fiat.