Reading Minsky: End the Fed? Not so Fast

     Minsky himself at least did not say as so many do "End the Fed." His was not the simplistic Ron Paul solution. Sit down with Ron Paul and actually get him to explain it and he's not really saying End the Fed either.

     What's interesting is that in theory almost everyone wants to  End the Fed. The Market Monetarists would like to and claim that their NGDP targeting scheme will make the system work almost as if the Fed were abolished or will take us down a road to where at some point we could End the Fed.

     Indeed Monetarism has always tried to present itself as a kind of Trojan Horse to End the Fed. The Left on the other hand likes the sound of "End the Fed" as it sounds populist and anti-elitist. There's a sense that all one needs do is declare that the Fed is just about the banks and not people and that's enough to condemn it.

     Just to underscore how widespread if not nearly universal the desire to End the Fed is Alan Greenspan-Mr. Federal Reserve himself, indeed the Maestro of the Fed-told us in his Age of Turbulence that he himself is kind of partial and fond of the gold standard. He doesn't quite advocate it but does admit that he's personally nostalgic for it and that he basically dreams of the age prior to the Federal Reserve.

     Yet Minsky did not advocate ending the Fed as is clear from a piece by the Levy Institute. He did not support the Treasury plan in 1991 for the Treasury to absorb many of the Fed functions.

     http://www.levyinstitute.org/pubs/eBook_2012.pdf

     As I understand it, his position of the monetary vs. fiscal debate is this. Let the Fed handle monetary matters-that is to say the financial economy. However he was not a fan of having as the Monetarists are the Fed handle most fiscal operations. Certainly he showed how wrong headed the DSGE school including the New Keynesians who think that Fed should handle recessions. The NK school to be sure-unlike the Market Monetarists-is allowing for fiscal policy during this deep downturn as we're up against the Zero Bound (ZB). However Minsky's position is that the fiscal authorities should handle the problems of the real economy, and the Fed should deal with the financial economy.

     This view of Minsky jibes with the view that I've been developing myself. What people who declare End the Fed never speak to is this: the economy has performed much better since the Federal Reserve Act. In the prior 40 years-1873-1913, the age of the classical gold standard-we were in recession half of the 40 years and there was a bank panic about once every 3 years. Since the rise of the Fed bank runs have ended. Indeed while the paper linked above talked about Glass-Steagall, the part of GS that was not abolished in 1999-Glass is a big part of why this is with the rise of FDIC.

     So we don't need to End the Fed-though some reforms I think are called for. Making it more directly accountable to the government-the kind of reforms that Barney Frank and the late Henry Gonzalez used to call for is in order. Actually even Sumner I think has spoke out against the Fed Governors. weakening if not abolishing their power would be a fine thing.