Friday, September 21, 2007

Central bankers agree: We don't need a central bank

Two comments from two central bankers give the lie to the need for central banks to control financial markets.

Defending the Reserve Bank's performance in setting interest rates over the last thirty years, RBNZ governor Alan Bollard told the finance and expenditure select committee: "It is quite conceivable - if there was such a thing as a free market setting all that - that we might have rates pretty much where they are." [Hat tip Nevil Gibson]

There is an obvious response to Bollard: if that's the best the central bankers can do, then why don't we have the free market setting "all that." If the very best the central bank can do is emulate the free market, then why not let the free market do what it does best, and without the cost of the Reserve Bank's galloping expansion of credit over recent years?

If your answer is that we need sharp-eyed central bankers to keep an eye on potential shocks, then former Fed chairman Alan Greenspan put paid to that thinking earlier this week when, in response to questions about "whether he was to blame for the sub-prime mortgage crisis by making credit too easy," he conceded on CBS' '60 Minutes' show that "he was aware at the time that questionable mortgage credit was being extended by banks, but he admitted he was unaware how pervasive it was or how impactful on the economy. He just didn't see the problem as it was developing."

The Galileo Blogger points out what Greenspan is conceding:
That is his argument against the Fed, whether he realizes it or not. No central banker, no matter how good, can possibly hold in his mind all relevant information to centrally manage the money supply and credit of an economy. Such is the fallacy of central planning. It doesn't work in banking, just as it has never worked in any other area of an economy. The collapse of Communism is proof of that... Greenspan is smart, but no single man or woman is smart enough to be a central planner.
So tell me again why we need a central bank? Remember if you will that it was all those sharp-eyed central bankers who delivered the Great Depression of the thirties, as current Fed chairman Ben Berbanke conceded a few years back.

I'll leave my final comment here to Larry Sechrest, who in a recent 'Free Radical' draws the obvious conclusion from all the evidence:
Mark this well. Central banks are the source of both inflation and business cycles. Tragically, many people seem to believe that both inflation and boom-bust cycles are somehow an intrinsic part of a market economy. They thus turn to the central bank to solve the problems that the central bank itself created. I might add that the very existence of a central bank introduces into all markets pervasive “regulatory risk” that would not otherwise exist. That is, market participants expend real resources in an attempt to forecast---and then cope with---the manipulations of money, credit, prices, and interest rates undertaken by the central bank. It all sounds frighteningly familiar.
That's the long-term solution then: Remove the Reserve Bank's monopoly powers, let the market set interest rates, and cut the govt's apron strings from the currency.

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3 Comments:

Blogger Greg B said...

... but they don't hold the economy in thier mind like some Dune Mentat...

Surely they just get whispered the password to the Excel spreadsheet. We like a human face on the spredsheet and we call ours 'Alan'.

9/21/2007 05:59:00 pm  
Anonymous raf said...

PC, This is a meaty issue to debate. Do we need a central authority for money. I would argue that we do but at the same time i think there is an argument for open source currency.

By this i mean complimentary, alternative and even virtual currencies. After all money is a process for exchanging goods and services.

If we decouple money from value and make it purely the energy of transaction (and measurement of activity) then perhaps the process is made easier.

I'd like to examine this more closely on my blog (www.sustento.org.nz/blog) but i'm in Europe for a month so not too inclined to spend hours at the PC!

One thing is for sure. We may need a central bank but we don't need any more central bankers :-)

9/25/2007 05:06:00 am  
Anonymous Banker said...

Raf

One thing for sure we do NOT need is a Central Bank. By Central Bank I refer to an institution which has been granted special government powers and which is able to bring into being un-backed fiat money. Completely un-necessary, this institution has been the cause of inflation.

Banker

9/25/2007 06:08:00 am  

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