Keeping The Federal Reserve
Debate Rounds (3)
I'd like to start with my stance which validates the need for a central bank system (or the Federal Reserve, in particular). The Federal Reserve is a central bank, or a system of banking which acts as a regulatory arm of monetary policy. The Federal Reserve, currently chaired by Ben Bernanke, has stated the mission statement of the central bank of the United States on the website of the Federal Reserve.
- Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
- Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
- Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
- Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.
I, therefore, maintain that the Federal Reserve's role in monetary policy is beneficial in that it is regulatory over surrounding banks to ensure safe practices, balances employment and inflation together, and adds revenues collected from interests accrued on government bonds into the US Treasury Dept.
I trust my opponent to have a prompt response and a valid argument.
The main problem with central banks is the result of their manipulations of interest rates. This creates malinvestment, typically in the form of overinvestment in capital goods industries. On the market interest rates are determined by consumer time preference. When central banks artificially decrease interest rates this sends a signal to entrepreneurs that consumers preferences have changed; time preferences have lengthened and consumers demand more goods in the future and fewer goods now. Resources are diverted from consumption goods industries to capital goods industries. Unfortunately this does actually serve the needs of consumers. Ultimately the market realizes it's error and self corrects. The bubble bursts, and there is a bust.
It is precisely thus that the recession is actually the healthy stage of the boom bust cycle, as malinvestments are liquidated and resources are redirected back to consumption goods industries. If central banks weren't tinkering with interest rates in the first place there would have been no boom and bust - simply steady prosperity.
Instead of a central bank monopolizing the money supply, what we should have is a system of free banking and competing currencies. A market in currencies would allow consumers to choose between different monies instead of being forced to accept the government monopoly standard. Most likely gold would win out.
The free market dictation isn't value neutral, and the boom-bust cycle my opponent listed as attributable to the Federal Reserve is plain false. Periods of booms and busts have existed long before the Federal Reserve was established, and is in fact, part of the reason the Federal Reserve was established in the first place. The current recession, caused by the Housing Bubble, had nothing to do with the Federal Reserve, as most banks which fell under the Fed's regulatory arm were, in fact, profitable. The standard argument, in regards to the on-going financial crisis, is that the government-backed monetary policy forced banks to take risks and lower standard, which in-turn is believed to have caused the Housing Crisis. This couldn't be further from the truth. Most high-risk loans fell outside of the regulatory arm of the Community Reinvestment Act, according to the bipartisan Financial Crisis Inquiry Commission. Thus, this attack on the Federal Reserve is based on an imaginary strawman, invented by proponents of the Free Market Fairy who fear the Inflation Monster.
When he brings up Keynes philosophy in regards in employment interest and money-flow, he fails to mention that the very theory he's being critical of has been employed and proven successful. As a means to combat unemployment, the Federal Reserve is well-capable going through phases of quantitative easing (QE 1, 2, an 3 respectively), which increase money flow in the economy. The resulting capitol increases spending power, which, in turn, increases demand. This is an example as to how QE practices can work to reduce unemployment without having the adverse effect on inflation my opponent thinks would take place. Malinvestment comes from toxic-loans, not the interest rates the Fed sets for other banks. The free-market dictates the amount of investment in capital, regardless of the interest rates set by the Fed. It isn't setting a false sense of security, it's encouraging growth which leads to long-term economic prosperity.
The liquidity trap he mentions fails to take into account the elephant in the room. Any other day, it's an issue. Today, we're in a global financial crisis in which our unemployment rate stands at 7.8% (according to the Bureau of Labor Statistics). You can't have your cake and eat it too. The tinkering with interests rates doesn't 'cause boom/bust cycles, but the basic economics of supply-and-demand do (as-in, if the demand causes the boom, and the ever-so ubiquitous supply without the demand to meet it causes the bust). For simple, steady prosperity to take place, regulation needs to protect the interests of the average American. When it came to the Community Reinvestment Act, the Federal Reserve worked.
Now to my critique of his proposals -- a system of free banking has existed before, and it proved to be dangerous. Following the repeal of the merger provision of the Glass-Steagall Act in the 1990s, banks immediately began taking advantage of the new-found power to merge investment banks with commercial banks. If you're a bank, this is great because you can grow. If you're the person who has their money deposited in the bank, this is bad because the firewall which protected your assets is now being gambled in an inherent conflict of interest. The problem with gold is that it is a finite resource, and economically unviable considering the demands of today's market. These demands require the standard of today's market (a fiat currency). It's precisely why industrialized nations of today have adopted a fiat currency system. Now, having laid my critiques, I'd like to move on. We're not talking about competing standards of currency, but the benefits of a central bank within the United States. I ask my opponent to stay on topic.
It is true that booms and busts preceded the federal reserve; both Hume and Ricardo wrote on the subject (Keynes arrogantly and falsely argued that he was the first to study this phenomenon). What you will not see, however, is a boom bust cycle without the phenomenon of monetary inflation. For example the panic of 1819 had it's origin in the war of 1812. The war brought with it monetary inflation as the government needed to borrow money in order to finance this endeavour. It is precisely this monetary inflation that the federal reserve and other central banks use - ostensibly to fight employment, but really to help finance wars.
That is the most important reason to abolish central banking. It's used to finance wars. Virtually every armed conflict has seen with it the state debasing the money supply. In the olden days, kings would clip coins. Today they just print new money, devaluing the currency individuals hold. Inflation is a tax, a secret tax, which robs everyone who owns wealth. It's immoral and without a central bank and fiat money there would be no inflation, and it would be very difficult for governments to afford the type of wars that are all too common these days.
The keynesian explanation that recessions result from a failure of aggregate demand is false. If this was the case then why are the problems not located in consumption goods industries? Keynes' theories are not integrated with general economic doctrine. They do not build on the edifice of Ricardo, Turgot, Augustine, the Scholastics and other economists who preceded him - instead his macroeconomic theories are simply his own flights of fancy, not grounded in general economic knowledge. Instead of refuting the Austrians Keynes simply ignored their explanations. Keynesianism was adopted in the similar style of a new fashion of clothes, just put on, without any reference to that which proceeded it. The reason for the success of Keynesianism is simple - it gives license to the state to do anything it wants to do. Today economists are mostly apologists for state power - there are no government actions, no matter how egregiously bad for the economy, that modern economists will not shill for.
If you want to solve the unemployment issue it's simple, and the answer isn't printing a bunch of money. All you have to do is get the government out of the way. Eliminate labour regulations - especially the minimum wage - and taxes on businesses, and you will have full employment in no time. While I agree that banks should separate into two different tasks, that of warehousing money and that of investing it, and that money which is stored in a bank for the purposes of safekeeping should not be loaned out and invested, pro is mistaken if he thinks this was not occurring prior to 1990 and the repeal of Glass-Steagall.
There is no need to increase the money supply. Inflation is a tax and it's harmful. Any amount of money supply is enough. Any amount of gold is enough. Indeed, the fact that there is a finite amount of gold and that it is difficult to obtain more is precisely the main argument in favour of a gold standard. It would end the evil that is inflation and usher into a new era of unprecedented prosperity. Some of us believe that it would better if it was more difficult for the government to steal all the wealth that we create.
I don't know why my opponent tied the boom/bust cycle back into artificial inflation. He completely ignored my point on basic supply and demand as a cause for boom/bust cycles. I ask that my opponent not rebut my points by falling back on talking points. The other leading causes of the boom and bust cycle (stock bubbles, credit expansions, a lack of demand with an overabundance of supply, and even a lack of optimism on the part of investors) also have little-to-nothing to do with the interest rates being set by the Federal Reserve. The Federal Reserve is the solution to the bust, not the cause. The cause is actually the free market.
I'm also unsure where the idea that the Federal Reserve exists to finance wars comes from. Considering the last two wars we had were paid for on 10-year treasury bonds, and the Federal Reserve only holds $1.6 trillion in US debt, this idea seems unfounded. I stated earlier this misconception in regards to the central banking system being unfounded. It's been displayed again. The method being, invent an imaginary strawman of the Fed, which bears no actual likeness to said Fed, then beat up on the made-up Fed. Another salient point which goes unchallenged is the idea of the Fed printing money. They're called Federal Reserve Notes, yes. But they don't just print money. That's actually the duty of the US Bureau of Engraving and Printing. The Fed has a finite amount of money. If the idea was to just inflate and deflate the currency to finance war, you could pay it all off on a one-dollar bill instead of a 10 year treasury bond. Obviously that's ad absurdum. You can't actually do that because the Fed can't actually do that. It's another example of the Fed being subjected to a strawman attack.
My opponent claims that Keynes' theories have not been integrated with general economic doctrine. I'm unsure if he's read general economic doctrine. If he has, he'd know that demand-side is the cherry-cake of economic doctrine. The yang of supply-side's yin. Economists Bruce Bartlett, an economic aid to Ronald Reagan has since renounced Supply-side economics in favor of a Keynesian view. It's a polar-switch. The demands of today's market don't rest on the supply end of it, and inflation only effects said supply end. There isn't enough demand in the market to drive the economy. It's the very reason the US automobile industry was in need of TARP funds. Nothing to do with supply, and everything to do with demand.
The claim that merely adding money into the economy doesn't bring down unemployment is false, yet again. It's been demonstrated in multiple ways, many of which differ only in who gets that money. The recession Reagan dealt with was solved by returning much of the money collected from taxes to investors, who in turn could pursue entrepreneurial ventures, which created employment. In today's economic environment, that coin needs to be flipped. We have the entrepreneurial ventures, but we don't have the demand to keep said ventures afloat.
As for the proposition that government needs to get out of the way to bring the economy back -- no. Government saved business. The free market wrecked the economy, not government. My opponent is so good to cite 19th century busts, but fails to acknowledge the safety nets invented to protect people during those busts. Labor regulations (OSHA, Fair Labor Standards Act) exist specifically to protect the workers from being victimized at the hands of the free market. They were invented specifically because people were being victimized by employers, who took the most profitable road, instead of the safest road to conduct their practices. It created a disregard for workers, in addition to consumers. It's specifically why these regulations exist in the first place. Minimum wage lowers poverty. Inflation occurs regardless of the Fed's intervention, since the Fed only controls the inflation on the side of banks (and that's not to say anything about fractional reserve banking). The minimum wage standard needs to be raised to meet the demands of inflation, not lowered. This is another example of the imaginary Inflation Monster unleashing his wrath. If wages were directly tied into inflation, then the costs of living should be a 1970 levels, since that's when wages began to stagnate, and all of the capital funneled upward. It's a logical fallacy.
Not all taxes are harmful, but that's an argument for another day. That being said, I've humored my opponent time and time again on subjects not related to the Federal Reserve (minimum wage, regulations, labor laws, etc.). I ask him, once again, to stay on topic and not create a shotgun blast argument which derails the topic at hand. We're not talking about the minimum wage, sir.
Inflation is evil. It promotes consumption instead of savings. It's a tax on wealth - and a hidden tax, a tax that people can't really see. Yet every day we are robbed of our wealth by a government which is so avaricious it will stop at nothing short of murder to ensure that it's tax slaves remain in compliance.
The federal reserve prints money. No, not literally, my opponent is correct, that is the purview of the treasury department. As Rothbard explains in 'What Has the Government Done to our Money' http://mises.org... what the Federal Reserve is exactly this. The Fed sets a reserve / deposit ratio of 1:10. This means for every dollar on deposit the bank only has to have 10% in reserve at the bank the rest they can lend out to people. The federal reserve increases the money supply (colloquially referred to as printing money) by buying assets on the market - almost invariably government bonds. This is the purpose of a central bank, to create and then loan money to the government, to finance deficit spending and amongst other things - wars. The government creates bonds and then orders the central bank to buy them. The whole thing is done by computers and credit expansion and the pyramiding of reserves.
If you look @ this chart :
from this link
you will see that the money supply closely follows bank credit expansion.
Ultimately, my opponents argument rests upon the age old hypothesis that we can create prosperity by printing money (strangely he argues both that the federal reserve does not print money, and that this printing of money is critical to the economy). This is simply not so. You cannot create wealth by printing money. Wealth is created through savings, channeld into capital, and the hard work of entrepreneurs and those who labour in the market economy. Printing money does not positive impact unemployment. The reason why people are unemployed is not because there isn't enough money, but rather because the government has made it a crime to employ large swathes of the potential work force at their market rate. The sickening thing is these labour laws target precisely those who are the most vulnerable and who need our help the most - low skilled workers. Just look at unemployment statistics for teenagers after the introduction of the minimum wage (teenagers are a representation of low skilled workers). Friedman explains :
If raising the minimum wage is a good idea, why raise it just a few dimes more? Make it $50. Then we'll all be rich! Except we won't, we'll all be out of work, because you made it illegal for employers to hire us all at our market rates. The minimum wage makes it a crime to employ anyone with a low skill set. This includes teenagers, but also people who have been out of work for a long time, homeless people, people with criminal records, the disabled, etc. There is a market price for the work that all these people can do - even if it is only a few dollars an hour. Take the example of a homeless man, with a drug habit. It's obvious he cannot work even the most basic minimum wage law. But what about hiring him to hold a sign, or some other very simple task which would pay almost nothing. A job like this might teach him valuable work skills, the meaning of an honest living, give him some pocket money. It might just be his only road to recovery - and the minimum wage made it all illegal. Or someone with a criminal record. Who on earth would ever hire this person when there are plenty of non criminals to hire. But what if the man was willing to work for much less? Then maybe some employer would take a chance on him, let him earn an honest living, and help him reintegrate with society.
The free market does not collapse in on itself, as Marx claimed. We do not need the government to 'save' the economy. It's not a damsel in distress. Far from saving us from recessions, the fed is responsible for the boom bust cycle. Far from fighting inflation, the fed is the reason why inflation exists. We must abolish all central banks, fractional reserve banking, and this system of fiat money. But if the fed is not going to regulate the money supply, if we are not going to have money socialism, then what do we replace it with? A system of competiting currencies. Let the market decide what sort of money we'll use. Most likely gold will result and we'll all enjoy steady prosperity, with no more business cycles or the evil secret tax on wealth that is inflation.
1 votes has been placed for this debate.
Vote Placed by Skepsikyma 4 years ago
|Agreed with before the debate:||-||-||0 points|
|Agreed with after the debate:||-||-||0 points|
|Who had better conduct:||-||-||1 point|
|Had better spelling and grammar:||-||-||1 point|
|Made more convincing arguments:||-||-||3 points|
|Used the most reliable sources:||-||-||2 points|
|Total points awarded:||0||2|
Reasons for voting decision: I'm giving a tie for arguments, simply because a lot of this debate consisted of the repetition of talking points without any citations. Con did cite a few in the last round, so I gave him sources, but for a topic like this both debaters really need to utilize data instead of relying almost exclusively on amorphous theory. After all, you ARE debating the utility of an existing institution with a long statistical track record. By awarding further points I would simply be affirming my preexisting views instead of rewarding a well supported case.
You are not eligible to vote on this debate
This debate has been configured to only allow voters who meet the requirements set by the debaters. This debate either has an Elo score requirement or is to be voted on by a select panel of judges.