George Selgin has a fascinating new paper that discusses various monetary reform ideas:
To improve the Fed’s current operating framework and reduce the chances for another financial crisis, I offer the five following prescriptions, all of which embody a Bagehotian perspective: (1) abolish the primary dealer system, (2) limit or abolish repos, (3) abandon “Treasuries only,” (4) revive the Term Auction Facility, and (5) stop last-resort discount window lending.
I like the way his proposals simplify and open up the monetary policy process. I won’t go into all the details here, but the thrust of the argument is that we should move from a bank-oriented regime to a market-oriented regime:
Conducting open market operations in a variety of securities, and not just in Treasuries, would increase the ability of such operations to take the place of both discount-window lending and emergency credit facilities during financial crises. It would therefore allow the Fed to perform its last-resort lending duties during such crises without departing substantially from “business as usual,” and especially without allowing the performance of those duties to interfere with the conduct of ordinary monetary policy. An expanded list of securities would also allow the Fed to spread its tri-party repo settlement risk across more than two clearing institutions (Board of Governors 2002, section 2: 3–4). Finally, security diversification would be a natural complement to counterparty diversification: taken together, the two innovations would allow the Fed to satisfy in a straightforward manner Bagehot’s requirement that central banks supply liquid funds freely, on any good collateral—a requirement which (as we have seen) isn’t necessarily satisfied by channeling funds through a handful of privileged firms only, and only in exchange for Treasuries.
I’m no expert on banking, so I’d be interested in what others think of his proposals. George provides detailed arguments for all five of the proposals listed in the quotation on top.
BTW, elsewhere I’ve called for increasing the size of the FOMC from 12 to 7,000,000,000, and also changing the one-man-one-vote decision-making system to one-dollar-one-vote. In other words, let the market implement monetary policy. It makes no sense at all for the very same institution to set the policy target, and also try to implement it, especially as they’ve never provided an explicit policy goal. The current system makes it almost impossible to hold the FOMC accountable. (I can already see the comments I’ll get—“that’s a feature, not a bug.”)