October 28, 2010 | 1 Comment
Buies Creek, N.C.—Dr. Lawrence H. White, a professor of economics at George Mason University, explained why the U.S. would be better off without a central bank. White spoke at the Campbell University Chapter of Omicron Delta Epsilon’s annual lecture on Monday, Oct. 25 at the Lundy-Fetterman School of Business.
“The Fed made inflation higher, distorted interest rates and made the recession deeper,” White said.
White holds the Federal Reserve Bank’s monetary policy responsible for the economic disasters of the past few years. The Fed caused the housing boom and bust by keeping interest rates too low for too long, therefore injecting too much credit into the system, he explained. Relaxing regulatory measures made housing prices rise and mortgage loans, such as floating loans, seem safe that weren’t safe. The huge collapse in housing prices caused the mortgage crisis. White recommended that the U.S. do away with the Fed and go back to the gold standard or a free banking policy
“When the Fed began raising interest rates, housing prices collapsed and caused the bubble to burst. Under the gold standard, there is a limit to how much the market can grow based on market forces,” White said.
Free banking is a monetary arrangement in which banks are subject to no special regulations beyond those applicable to most enterprises, and in which they are free to issue their own paper currency or banknotes. In a free banking system, market force control the supply of total quality of banknotes and deposits that can be supported by any give stock of cash reserves where the reserves consist of either a scarce commodity such as gold or artificially limited stock issued by a central bank. However, the strictest version of free banking there is either no role at all for a central bank or the supply of central bank money is supposed to be permanently frozen, therefore there is no agency capable of serving as a “lender of last resort,” nor is there any government insurance of banknotes of bank deposit accounts.
The decentralized system works more efficiently because banks behave more conservatively in a market where they have to compete for customers, White explained.
“Free banking would have made the recent crisis very, very unlikely,” said White. “The Fed bought 1.5 trillion in toxic assets (mortgage backed securities) in order to keep their prices up besides bailing out AIG and Goldman Sachs. Banks keep themselves more secure with free banking.”
Photo Copy: Dr. Lawrence H. White, professor of economics at George Mason University, chats with Dr. Mark Steckbeck, assistant professor of business, at the Omicron Delta Epsilon lecture at the Lundy-Fetterman School of Business.
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