Anna Leonard 11/8/11 Extra Credit Summary The speaker convinced us that we need a replacement for the Fed.

People think that the Fed is all knowing and benevolent. The real nature of the Fed was exposed 100 years ago. Before the Fed the financial crises were not as bad. After the Fed there was the 1970 crisis. The unemployment rate depends on the monetary policy. The unemployment rate doesnt tell a lot. The Fed can control the behavior of prices. The Fed has more control over prices. From 1790 to 1913 the price index was stable. From 1913 to 1918 the high inflation was worse than in the 1970s. In the 1930s there was the bad type of deflation. Nixon closed the gold standard. After that there was a 250 fold increase in prices since the Fed was founded. Now the prices rise in an unpredictable manner. Because of this firms and people dont want to invest because the price level is unpredictable. The Fed has had some of the worse periods of bad deflation. The government has to spend more during a downturn. The economy has gotten more stable after the Fed. NBER was highly inaccurate before the 1930s. Christina Romer said that the recession was 1 month longer before WWII. Before 1933 there were few banking crises. There was no proof of the Fed doing something in 1934. When deposit insurance stabilized banking. The Fed doesnt help banking. The Fed made the Bear Sterns crisis worse. Central banks supply liquidity to strong banks, but not weak ones. Walter Badget wanted the Bank of England to work better but he didnt want to get rid of it. What is best is if the banks keep their own cash reserves. Scotland had no central bank and had no instability Badgett compared getting rid of England bank institutions to getting rid of the monarchy. We should not go back to pre-fed system. An alternative is the old Canadian system in the 19th century. 12 national banks had their own currency. We have no adjustment with the currency supply. Every in Canada the currency system went up and down with the harvest. Critical Thinking Just as the Communist government had too much control over the economy, the Fed has too much control over prices. Because the prices are so unpredictable there may be price ceilings to keep the prices at a certain level. Unpredictable prices may also affect the prices that firms have to set, in relation to the overall market, and will cause consumers to buy foreign goods. Because the Fed spends more during a downturn there is a larger tax on buyers and sellers increasing the deadweight loss. The firm can figure out what price to set, but the Fed cannot therefore creating an unpredictable price level.