The Fed is made up of three parts, and two of those three parts are valid and essential – its role as the government’s bank, and its role as local bank auditor. Even the research aspect of the monetary policy branch of the Fed is important. If the Fed did not set monetary policy, then Congress would find a way to control it. The Fed gets a bad rap for its perceived effect on interest rates, but it does still have some very important responsibilities – and remember, the Fed was created because local banks weren’t quite cutting it on their own.

So, I think Alyssa’s points are useful. For the time being, we’re stuck with a government that controls money. We’re also stuck with the Federal Reserve. Given those constraints, it’s probably better to allow the Fed to operate with a significant degree of independence from political whims.

I made some similar points a couple of years ago in my own blog entry about the Federal Reserve. Looking back at it now, I gave the Fed far more credit than it deserved, claiming that “the people running the Federal Reserve today understand the damage that irresponsible Fed policy can bring.” The intervening two years have demonstrated otherwise.

Later in that piece, though, I quoted a Reason interview with Milton Friedman, in which he said:

[... T]hough I want to know what my ideal is, I think I also have to be willing to discuss changes that are less than ideal so long as they point me in that direction. So while I’d like to abolish the Fed, I’ve written many pages on how the Fed, if it does exist, should be run.

That pretty much holds true for me today. If we can get rid of the Fed, so much the better. Its scholars may provide us with good economic research, but there’s no reason to bundle academic inquiry with the power to set (or disproportionately influence) monetary policy.

But we have a Fed, and as long as it still exists, we’re probably better if politicians keep their grubby mitts off of it.

Ostensibly the Fed exists as a government appointed group which will maintain a “sound fiscal policy” or something equally vague. The problem that I and others have with it is that it’s history has been one of persistent inflation (a rather insidious form of taxation on holders of currency and a way for the government to spend money ex nihilo) and bad behavior exacerbating business cycles, such as cranking up the heat in 1930 on an already struggling economy.

Here’s my question: If we get rid of the Fed, ostensibly the powers of the Fed will fall back to congress, right? Is this desirable in the eyes of anyone who is currently unhappy with how the Fed operates? Am I viewing this problem in the wrong way?

You’re doing it wrong. Fed is the singular cause of an unstable economy.

http://online.wsj.com/article/SB10001424052748704782304574542280971009044.html#

http://www.cato.org/pub_display.php?pub_id=10419

http://fee.org/articles/bankers-bank/

I highly recommend the Mises Institute’s “Money, Banking and the Federal Reserve” documentary, which is available for free on Google video.

http://video.google.com/videoplay?docid=-466210540567002553&ei=AnEES8PSMZLiqgKUm_C6CQ&q=money+banking+and+the+federal+reserve#

Arthur Burns did Richard Nixon some favors when Nixon ran in ‘72. Not that he needed it. Paul Volcker did Jimmy Carter no favors in ‘80. Carter probably couldn’t have pulled it off, but, in doing the right thing, Volcker did not help Carter’s cause.