Thursday, March 26, 2009

A lot more of less

The more you think about the Geithner plan, the less there is to like about it. 

It's a complicated and not terribly transparent way to deal with the problem, and that makes it susceptible to (further) looting.  Given that it operates behind the scenes, at a level few people are capable of understanding, it is not a very democratic way of solving the problem.  It also completely intertwines the Fed with the Treasury, which makes the central bank a quasi-fiscal agent

The opaqueness of the financial operations of the Fed in support of the financial sector (which are expanding in scale and scope at an unprecedented rate) and the lack of accountability for the use of taxpayers' resources that it entails threaten democratic accountability. Even if it enhances financial stability, which I doubt, democratic legitimacy and accountability are damaged by it, and that is too high a price to pay.

In his book, Koo turned a phrase I had never heard before -- an independent central bank should be considered the fourth branch of government.  That struck me as precisely correct.  If we are not going to be on a gold standard (and I think Keynes has sufficiently pointed out that there are better solutions) we do at least need some sort of sound money.  The Fed mandate of price stability is no longer credible if you are going to use it to bail out private risk-taking.  This eliminates the last remaining check and balance in the original system system of US governance -- the states got squashed by the federal government, congress got run down by the president, and the supreme court was always just a bunch of pansies.  Now we no longer have gold or an independent central bank, which effectively collapses everything into the person of the president and his minions.  Unfortunately, after eight years of Bush, nobody trusts the executive branch to do the right thing anymore, so even if you believed we have just elected a saint, you still have the problem that he is trying to herd cats.  The whole mechanism of power is falling apart.

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