Some History of The Fed

"Get rid of the Fed" some guy on youtube screams.

Let's look at history. Modern commercial banking developed pretty much in tandem with the industrial revolution.

In the industrialized nations, under the "free markets" practices which were followed, there were rounds of systemic banking crashes roughly every 15 years. (Krugman argues every 5, but it depends on what you consider as included as a systemic crash.)

The Fed was formed in the early 1900s, primarily as a clearing bank - helping banks in one area of the country clear checks deposited with them which are drawn on banks in other areas.

In the early 1930s, following the crash of 29, the Fed was given expanded powers to regulate banks. Their central mission was to support "the safety and soundness of the banking system." (When I worked on the legal aspects of banking projects involving new products or variations of old products - one key part of every submission to the Fed in support of the products was an analysis of how the new product and how we would handle it conformed to safety and soundness principles..)

Through this role of the Fed, American commercial banking was stabilized, and the periodic and regular rounds of crashes were eliminated. We had a stable banking system from the 30s to 2008. (BTW: in case your thinking about the S&L crisis: The S&L crisis didn't involve fed regulated banks - S&Ls were not and are not commercial banks - and the S&L crisis arose from congress giving S&Ls vastly expanded powers with no increase in regulatory oversight.)

In the mid 80s, Reagan appointed libertarian Alan Greenspan to head the Fed. Greenspan was and remains a libertarian who is opposed to government regulatory power. (He was a personal friend of and was mentored by Ayn Rand.)

Greenspan did not see his job as using a regulatory structure to assure bank system safety and soundness. He believed the banks would self-regulate, acting wisely to protect their own interests. (He did admit after 2008 that his belief was a mistake.) He reduced regulations and regulatory compliance. He actually saw his job as supporting the banks in whatever they wanted to do - not to pursue safety and soundness goals.

For up to 80 years the Fed provided us with the most stable banking system I have ever read about or experienced.

The "Libertarianized Fed" is the disaster - get rid of the libertarian influences and let the fed get back to promoting safety and soundness - and get away from supporting them whatever they do.

Getting rid of the Fed is essentially what Greenspan did - with disastrous consequences.