“…doing the same thing over and over again while expecting a different outcome.”
If this is, indeed, insanity then it is sadly too common in human behavior—especially in our convoluted system of money, credit and banking.
Depending upon what we read and to whom we listen, we are told that the Fed is following its monetary policy with the goal of stabilizing the broad price level, reducing unemployment, raising economic growth, dampening euphoric credit markets, reducing the impact of terrorism, stimulating bank lending activity, absorbing ballooning government debt, stabilizing foreign exchange rates, guarding the economic recovery, taming commodity prices, etc.
At the same time, looking at the private banking system we were told that the recent credit bubbles were due to excessive lending and poor underwriting of loans—too many mortgages to too many weak borrowers, too many unsecured personal loans, and too many loans to weak and speculative businesses. Now we are told that banks are too reluctant to lend the unprecedented flood of liquidity from the Fed. Like “deer in the headlights” they are simply accumulating and holding “excess reserves” while frustrated borrowers get little or nothing. To our amazement, this last statement was actually validated by the recent observation that currency held by the public and within banks actually exceeded the so-called M1 money stock, total currency held by the non-bank public plus all checking accounts. Clearly our current money and banking system is badly broken.
But, in truth, since its inception in 1913 it has never worked well. It has always been racing around trying to put out spot fires largely due to its own previous policies. Despite all the political pressure applied to the Fed and its Chairman, if you have but one policy variable, money growth, you can logically have only one target. However, our monetary system is designed to fail. Irresistible political pressure always forces it to chase many and changing targets. On top of this, the additional uncertainty of private bank lending, or the lack thereof, also works to ultimately determine the size of our money supply. This makes it impossible for the Fed, even with the best intentions, to actually control monetary growth.
What should be the over-riding goal of money is to be a trusted store of real value—the very instrument of wealth we would prefer to hold over time. As a benchmark of valuation and pricing of other goods, it should be simple, logical and understandable. Its supply should be derived from the needs and desires of a private market and not the child of a policy intended to micro-manage the economy or generate a covert inflation tax to the government. We need to break the cycle of insanity. That is why we need productive capital as money.