04 September 2012

Federal Reserve

With a bunch of “End The Fed” crackpottery floating around, I'm long overdue to assemble some materials about the Federal Reserve. Here are some links:


I recently stumbled across a blog post which actually provides about as good an explanation in 250 words of why Keynesian stimulus is supposed to work.





Or, let's say the economy deteriorates and 2 more more million get unemployed. Now there are few coupons and some may be willing to do the job for ¾th of a coupon (deflation). Now essentially Treasury can print extra 1 million and distribute them.


  1. We need flexible money supply.
  2. Having gold standard is stupid. What does amount of gold supply have to do with anything?
  3. We increased GDP by simply printing pieces of paper.


The host of this post is actually a libertarian skeptic of Keynesianism, quoting a commenter; his argument against this is nuh-uh, that's absurd! Really; go look if you doubt me.

I haven't looked closely at any of the other discussion on that blog, but I scent Austrianism since there's the explicit allusion to gold. Austrian economics holds that one must abolish the Federal Reserve and return to a gold standard in order to banish the boom-and-bust cycle of the economy. This is the school favored, most famously, by Ron Paul, but the father of this school is Ludwig von Mises.

Because of some discussion on Facebook I am reminded of a long blog post from Brad DeLong trying to puzzle out how von Mises' theory works.

I find myself under a mysterious but inexorable and irresistible compulsion to waste what would otherwise be productive work time trying to make some kind of sense of it — to at least understand wherein lies the error, and how somebody trying very hard to understand the economy (never mind that he is a big fan of the political leadership of Benito Mussolini) can go so pathetically wrong.

The crack about Mussolini references von Mises' praise of Mussolini, which is troubling but not necessarily a proof that von Mises' economics is wrong.

Unhappily, DeLong fails to find a clear theory that he can find wrong. He proposes several possible descriptions of von Mises' thinking, but all of them founder on the rocks of things that von Mises said. “Not right, and not even wrong.”



The post attempts (mostly) to be clear to folks with a decent lay understanding of economics, but if you're coming from a cold start it may be tough sledding ... though some Google should make it possible to follow.

There is one reference that I'll Google for you in advance: the babysitting coöp. It's another famous short example of the logic of Keynesian stimulus that Paul Krugman is fond of alluding to. He has a short version of the babysitting coöp story at Slate. I found it very clarifying when I first encountered it; I'd encourage you to click through to it before taking on DeLong's lengthy post.

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