At the Cato Institute Monetary Policy Conference, Part 7 (Final, Recap)

What I wrote in the prior six pieces were the thoughts of the speakers, mostly.  Now for what I think.

There were a number of free banking advocates at the session today.  I do not favor their views.  Though I am ordinarily libertarian, with finance I believe that depositary institutions must be required to match assets and liabilities, because the losses to society as a whole from financial panics are big, and they can be easily avoided with modest regulation.  This is true whether we are under a gold standard or a fiat money standard, or anything inbetween.

I personally favor a gold standard because it leads to fewer problems than a fiat currency standard.  If you don’t agree with this, wait a few years for the current monetary policy approach to blow up, and you might agree with me.

Does the gold standard burn in my heart?  No, I just think it is a better idea — we could have a fiat currency standard, and constrain the slope of the Treasury yield curve, and that would work also, just not as well.

I agree with most at the meeting today that the Fed was a bad idea, but it will not be easy to eliminate the Fed.  That said, if we have a significant crisis because of Fed policy, it will be time to bring out the long knives and eliminate it — replace it with a gold standard, a commodity standard, or a constrained central bank not allowed to do bailouts, and constrained by yield curve slope.

One thing that most agreed on is the need for a single mandate, not a dual mandate.  Inflation should be the only target of the Fed.  I agree, largely because the ability of monetary policy to affect employment is weak.

Allison’s talk was a highlight of the conference.  His experience with BB&T gives him unique insights into how banking regulation works, really, how it doesn’t work.  is characterization of how bank regulators worked was spot-on.  They exacerbate crises.

The conference had a strong sense that the Fed is creating asset bubbles via QE, and that it discriminated against the poor in favor of the rich.  I agree, as did Ron Paul two years ago at the conference.

As with many at the conference, I agree that the Fed has created most of our problems. Central banks are the problem, not the solution.  Their actions tend to be pro-cyclical, not anti-cyclical.

Finally, Scott Sumner, the most controversial guy of the day.  If I didn’t much care for NGDP targeting before, I care less for it now.  If he can’t see that monetary policy was too loose 2001-7, then to me, he is like Keynes, a man for whom monetary policy could never be too loose.

Final notes:

I care more that we constrain the banks such that they match assets and liabilities, than over the medium of exchange.  Crises happen because illiquid, long-dated assets are financed by short liquid liabilities.  This allows for run on the bank scenarios, which occurred through the repo markets, and portfolio margining in the last crisis.  This was not focused on at today’s meeting, and was an intellectual weakness of the meeting today.

All that said, it was a really good meeting, and I am glad that I went, mostly for the people I met.