Tuesday, October 25, 2005

Why We Should NOT be Excited about Ben Bernanke's Nomination

It is official, Ben Bernanke (subscription required) probably will be US's next Fed-chief. Pundits from all quarters give his nomination a big thumbs up, including my teacher Tyler Cowen up at George Mason.

I beg to differ, and here is why.

Inflation is always and everywhere a monetary M Friedman told us long ago. In modern day monetary arrangements, that means bad monetary policies originated from central banks are to blame whenever inflation occurs. Because of this, who is calling the shot at the Fed's helm matters a great deal. That explains the intense interest people have, especially those who work in the financial sector, on who is going to succeed Mr. Greenspan.

Things do not have to be this way. We free market believers do not trust government intervention, period. So to be consistent, we should not trust central banking as well. And we do know that a better monetary arrangement exists. That is free banking. With free banking, we can do away with central banking completely and we have no need to sweat over who is going to succeed Mr. or Mrs XXX as the next Fed chief.

Free banking will set market forces free, and instill monetary stability. For a short overview on what free banking is, read this note by Professor George Selgin at U of Georgia. George is an expert in free banking, both in terms of its theoretical underpinnings and its history. One of his historical pieces investigated "Free Banking in Foochow" during the Ching Dynasty (1644-1911). (I was his research assistant for the paper)

For a more in depth look on the relative merits of free banking vs central banking, read this book by Vera Smith here. Vera Smith was Hayek's student when Hayek was teaching at LSE. The book set out to examine: "the relative merits of a centralized monopolistic banking system and a system of competitive banks all possessing equal rights to trade" (p. 3).

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