Banking, Finance, Monetary Policy: Notes on the new Stoa Topic [updated]
The Stoa league offered three policy resolutions: 1. banking, finance, or monetary policy reform, 2. Federal labor law reform, 3. Veteran’s policy reform. Stoa resolution wording and discussion is here.
[Update: the banking/finance/monetary policy topic was selected.]
My organization, Economic Thinking, holds workshops and posts articles and videos on the economics of high school and homeschool policy and LD topics. So here are initial notes on the first of these three resolutions.
• Reforming USFG “banking, finance, and/or monetary policy”
Monetary, banking, and finance principles and policies are complicated. Complex federal banking regulations, along with the Federal Reserve policies and quasi-federal home-lending agencies, Fannie Mae and Freddie Mac, contributed to the 2008-2009 financial meltdown. And since the U.S. has a mixed economy with both government and business playing major roles in banking, home-lending, and finance, blamed can be heaped on both the government and private sector.
When things go wrong, as they did in the Great Recession (and earlier Great Depression), pro-market advocates blame too much regulation and pro-government advocates blame too little regulation. So anti-business critics blame private banks, home-lending firms, developers, and ratings agencies, while anti-regulation critics blame government-backed mortgages, along with too much and misguided regulations.
But reducing some government subsidies and regulation, in medical care of finance industries, still leave other government subsidies and regulations. Scott Sumner in When “deregulation” becomes crony capitalism (EconLib.org, April 7, 2018), writes:
In the end, all we have is a call for “deregulation” (i.e. removal of Dodd-Frank) so that there will be no legal barriers to government bailouts of big investment banks.
Sometimes it seems as though in modern America there are only two choices on offer, statism and crony capitalism. There is no political party advocating actual free market capitalism.
PS. Just to be clear, I’d love to see Dodd-Frank completely abolished, if combined with a policy of removing government protections from the financial system. But as long as we have the GSEs, FDIC, TBTF, FHA, etc., then “deregulation” is often just a cover for crony capitalism.
Learning about these various federal alphabet agencies will be part of the research burdens for debaters if this resolution is chosen.
Here is a question and answer video with BB&T’s John Allison discussing the ways various government lending programs and financial regulations made the financial crisis, and how federal programs and subsidies (like TARP) slowed the recovery.
A helpful overview of reform proposals is in this review of the 2015 Rethinking Monetary Policy – Cato’s 33rd Annual Monetary Conference. What should be the goals of USFG monetary policy?:
There was a broad consensus among the panelists — the Richmond Fed’s Jeffrey Lacker, the Bank of Mexico’s Manuel Sanchez, and George Tavlas of the Bank of Greece — that monetary policy should focus on price stability, while steering clear of objectives it is less suited to, like boosting growth, guaranteeing financial stability, or pricking asset bubbles.
My background presentation on “Money and Inflation,” at a FEE seminar in Colorado, is on Youtube, and embedded below.
Reforming USFG Banking, Finance, or Monetary policy
The notes above and John Allison video focus mostly on reforming today’s complex federal banking and financial regulations. John Allison also mentions overall monetary policy, saying the Federal Reserve kept interest rates too low for too long, leading to risky investments in real estate.
The broader question of monetary policy will be popular if this resolution is chosen. Robert Murphy’s article Austrians vs. Market Monetarists on the Housing Bubble (Independent Institute, October 9, 2018) looks at current debates over monetary policy and the housing/financial crisis of 2007/2009:
We Austrian economists frequently cross swords with our Keynesian foes on all manner of economic analysis and government policy recommendations. Yet the standard Austrian analysis of the business cycle is also sharply at odds with that of the “Market Monetarists,” a new school of thought coming out of the Chicago school tradition and now gaining traction at places like the Mercatus Center. In particular, prominent Market Monetarists have challenged the Austrian narrative of the housing bubble, arguing that the claims of “malinvestment” and the need for reallocation of resources do not fit the data. Yet as we’ll see, it’s the Market Monetarists who are defying common sense with their alternate version of history.
The Alt-M blog highlights the summer 2019 issue of the Cato Journal Monetary Policy 10 Years after the Crisis—New Issue of Cato Journal (Alt-M, May 22, 2019) with an overview of articles (full articles are online):
“An understanding of the role of trust, the rule of law, and free markets in creating sound money and credit is essential to avoid policy mistakes that favor special interests and increase uncertainty. By studying the Fed’s experiment with unconventional monetary policies, lessons can be learned on how to reform the monetary regime and mitigate business fluctuations caused by the monetary mischief inherent in our current unconstrained discretionary monetary policy arrangements.”
Also, the American Institute for Economic Research (AIER) manages the Sound Money Project:
The Sound Money Project was founded in January 2009 to conduct research and promote awareness about monetary stability and financial privacy. The project is comprised of leading academics and practitioners in money, banking, and macroeconomics. It offers regular commentary and in-depth analysis on monetary policy, alternative monetary systems, financial markets regulation, cryptocurrencies, and the history of monetary and macroeconomic thought. The Sound Money Project also hosts an annual essay contest. For the latest on sound money issues, subscribe to our working paper series and follow along on Twitter or Facebook.