A Stitch in Haste

Now is a good time to summarize my general thoughts on the Federal Reserve System.

--A national currency (i.e., money supply) is both a legitimate public good and an enumerated power of the federal government.

--A gold standard is both impossible and undesirable. Fractional reserve banking is not an abomination.

--There is one and only one legitimate monetary policy: Changes in the money supply should reflect changes in real output, adjusted for changes in money velocity. (Note: That's just a fancy way of saying: "No government-imposed general inflation or deflation.")

--To the extent that the Federal Reserve performs or facilitates the function of maintaining our national currency and implementing the aforementioned monetary policy (i.e., by administering the fractional reserve framework underlying the money supply), it is not an affront to libertarianism.

--To the extent that the Fed deviates from that core function, it is an affront to libertarianism. Specifically:

--It is not the purpose of the Fed to prop up the stock market.

--It is not the purpose of the Fed to prop up the subprime lending market specifically or the credit markets generally.

--It is not the purpose of the Fed to manipulate the dollar relative to other currencies.

--It is not the purpose of the Fed, or any part of government, to bail out anyone after their own financial recklessness, or to prevent or punish "predatory" lending (or "predatory" anything, for that matter).

--The Federal Reserve has the following controls over the financial system:

1. The discount rate should be adjusted to reflect, not to control, the rest of the yield curve.

2. The reserve requirement can and should be adjusted only to reflect evolving financial systems (e.g., e-commerce).

3. Open market operations are only a proper function of government to the extent that they are used to implement a proper long-term monetary policy. Using short-term open-market operations (i.e., manipulating the federal funds rate) is not a legitimate function of the Fed under any circumstances (i.e., the fed funds rate should float freely).

Discuss.

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Related, if light-hearted, thoughts at LoSC, Hodak Value.