Forest Fires and Central Banking

We can create a force that eliminates forest fires, but there will be a cost.  A certain amount of forest fires are normal, and if we don’t have small forest fires, we will have big ones that happen infrequently, and cause a lot of damage.

Central banking is similar. Good central banking allows for the extinguishing of a lot of bad debts.  Bad debts should fail, and the Fed should not rescue them.  Better that the Fed should imitate William McChesney Martin, Jr., and allow recessions to do their good work, eliminating bad debts that would otherwise encumber the economy.

“I’m the fellow who takes away the punch bowl just when the party is getting good.” – Fed Chairman William McChesney Martin, Jr.  He was a great central banker, as was Volcker.  Both of them embraced pain.  Wimps, like Greenspan, Burns, and Bernanke, embraced no pain, and assumed that their lame efforts to support the economy would actually aid things.

The Fed should have a single mandate, but it is not the mandate commonly proposed.  The Fed should restrain the total growth of credit in the economy, and ignore inflation and unemployment.  Let the Fed defend us against depressions.  It can succeed at that.

As for inflation and unemployment, the Fed can state that they can’t do anything about unemployment, which is largely true.  Inflation — that they can do, if it is desired, but they will need to stop doing QE, and do unsterilized purchases of debt.

That’s all for now.  Just remember that the government has a hard time interfering in the economy.  It doesn’t work, but they try to make it look like it works.

Democrats, Republicans — just remember that they can’t deliver what they promise you.

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