At various times, I’ve advocated simplifying the US monetary system.  I’d like to see us abolish reserve requirements, discount loans and interest on reserves. The only goal of OMOs would be to stabilize NGDP growth.  The Fed would have no involvement with the banking system.  Once I even went so far as to suggest going back to the early days when deposits at the Fed did not exist, and the entire monetary base was cash.  Admittedly, this is a somewhat regressive step from a technical perspective (Woodford and Cochrane would be horrified), but I thought the gains would outweigh the costs.  It would clarify that the Fed’s only purpose is to adjust the supply of the medium of account until NGDP growth was stabilized, with that goal of achieving more stable labor and credit markets.  This has almost nothing to do with banking.  In 2008, they went far off course by focusing on banking and ignoring NGDP.

If the government wants to get involved with banking, I would assign that task to the Treasury.  They might impose capital requirements, or a regulation forcing banks to make bonds convertible into equity in a crisis.  Maybe they would bail out banks that are “too big to fail” (my least favorite option).  But all of this would be completely divorced from Fed policy.

Of course these ideas are far too radical to be enacted.  So what would a more pragmatic proposal look like, which moved in this general direction?  I’d highly recommend reading George Selgin’s (Heritage) paper on a “flexible open market alternative” to the current mish-mash of ad hoc Fed policies.  Here George provides the basic framework for thinking about these issues:

More fundamentally, recent experience suggests that the conventional dichotomy of “emergency” and “ordinary” central-bank liquidity provision, though it may have had some merit in the distant past, has outlived its usefulness. When implementing “ordinary monetary policy” meant little more than maintaining the gold standard, last-resort lending posed a separate, if not conflicting, challenge. A modern fiat-money-issuing central bank, in contrast, has but one fundamental duty to fulfill. That duty consists of supplying cash, meaning currency and bank reserves, in amounts sufficient to meet macroeconomic targets, and doing so efficiently, that is, so that newly created cash is assigned to those parties that can gain, and are therefore willing to pay, the most for it.

Here is the centerpiece of the proposal:

Once flexible OMOs are established, the Fed should permanently close its discount window, which such operations will render redundant at best and a source of inefficient credit allocation at worst. Any institution that resorted to the discount window as a source of last-resort credit in the past will be able to participate in the Fed’s routine credit auctions using the same collateral it might have employed in securing a discount-window loan. However, instead of being guaranteed support, under pre-established terms, or having the Fed unilaterally determine to support it, it must secure funds by outbidding rival applicants. Thus the flexible OMO alternative improves upon bilateral Fed lending, not only by avoiding the stigma connected to the latter, but also by checking moral hazard.

Finally, Congress should improve oversight of the Fed’s broadened open-market operations, to assure that those operations are conducted in a manner consistent with efficient credit allocation, and especially with the avoidance of any implicit subsidization of risk-taking.

And here George summarizes the goals of this proposal:

What distinguishes the flexible-OMO plan from these precedents is that it envisions a single facility only, supplying both routine and emergency credit, and doing so in a way that relies to the fullest extent possible on market forces, rather than on decisions by bureaucrats, to achieve an efficient allocation of liquidity among competing applicants. By allowing a broad set of potential applicants, using a wide range of eligible collateral, to compete for available funds, not only in private markets, but, when necessary, at a single Federal Reserve facility, flexible OMOs minimize the Federal Reserve’s credit footprint, and thereby prevent it from taking part in either deliberate or inadvertent credit-allocation exercises for which fiscal rather than monetary authorities ought to be responsible.

These excerpts don’t do full justice to this excellent paper.  For instance, George discusses how some of his ideas have already been implemented by other central banks, such as the BoE.  I strongly recommend that people interested in monetary policy read the whole thing.

PS.  David Beckworth interviews George Selgin on this topic.

In retrospect, one of Trump’s most revealing statements occurred during the campaign, when he responded to a question about Putin’s atrocities by pointing out that the US isn’t so pure either.  You might think that was Trump showing his knowledge of Noam Chomsky. I doubt it—Trump doesn’t read.  Instead, I believe that Trump gets his ideas from Hollywood films.  In real life, the President doesn’t order the CIA or NSA to go around assassinating America politicians, journalists and businessmen who oppose him.  The CIA doesn’t kill President Kennedy.  But in Hollywood all of these things do occur, as the big, faceless, amoral and powerful federal government makes an almost perfect villain.  Trump confuses movies with real life, and actually thinks the US government is as amoral as what is portrayed in films, as amoral as Putin’s government.  Thus Trump is surprised when the generals tell him he can’t just drop nuclear bombs on people he doesn’t like, and we can’t just steal Iraq’s oil.

Trump is a spoiled billionaire, who doesn’t have a sense of what things “just aren’t done.”

Trump thought the Dems would be elated by his firing of Comey, because many Democrats had called for the same—outraged by the FBI director’s treatment of Hillary in the final stages of the campaign.  What Trump didn’t understand is that certain things just aren’t done.  And one of those taboos is firing the head of the FBI because you are angry that he is investigating links between the Russian government and some of your top campaign officials.  I see this same flaw in many commenters; they underestimate the importance of process, and focus entirely on content.  Comey may have deserved being fired (I have no opinion), but it is not acceptable to fire a top law enforcement official because that person is investigating your administration.

It’s just not done.

PS.  Or at least it wasn’t acceptable in the past.  If it now becomes acceptable then that will be one more indication that we are becoming a banana republic.  The GOP of 1974 would not accept Nixon’s abuses of power.  How will the GOP of 2017 react?

PPS.  And how will voters react in 2018?  If I were the GOP I’d be much more worried about Obamacare, which probably won’t be repealed.  GOP candidates running in 2018, and promising to repeal Obamacare, will be laughed at.  It’s not good when your own supporters laugh at your promises.  Expect the Dems to retake the House–then the investigations will get serious.  I can’t wait!!

I was sad to hear that Allan Meltzer passed away today, at the age of 89.  I always thought of him as one of the leaders of monetarism, along with Milton Friedman, Anna Schwartz and Karl Brunner (with whom he frequently collaborated on research.)  Unfortunately I didn’t meet Allan until he was in his 80s, but he was still quite energetic and passionate about both monetary economics and classical liberalism more broadly.  As recently as last year he participated in the Mercatus colloquium on the effect of low interest rates, and also spoke at one of our events.

My views on monetary policy were shaped by many different influences, but none more important that the monetarist revolution of the 1960s and 1970s, in which Meltzer played a key role. He also wrote a very interesting book on Keynes, whom he argues has been widely misunderstood.

Although market monetarism is somewhat different from traditional monetarism, in my view we are carrying the torch forward, with updates that are very much in the monetarist tradition (i.e., the view that markets are more efficient than bureaucrats.)  I would hope that future monetarists improve upon some of our ideas.

I met Meltzer at 3 or 4 conferences over the past 8 years, and he was always very nice to me.  I’ll miss him.

Bannonism might be loosely described as left wing economics plus xenophobia and nationalism.  Today, French voters rejected that ideology by an overwhelming margin:

Notice that Le Pen’s support was concentrated in the socialist regions in northern France (its rustbelt.)

I found it interesting that so many American conservatives and libertarians seemed sympathetic to Le Pen. Imagine an election where Hillary ran against Jeb Bush. And suppose all their views were the same as now, except that Hillary suddenly became highly xenophobic on trade and immigration.  On other issues, she remained well to the left of Jeb. Would that be enough to get many American conservatives to support her?  Steve Bannon certainly would, but I doubt many others would follow. Yet when it comes to France, even Donald Trump seemed more sympathetic to Le Pen than Macron, even though Le Pen is far more left wing on economics.  Weird.

I said that the French rejected Bannonism, but perhaps Bannonism originated in France:

It is also striking how often Bannon’s rhetoric mirrors that of Marine Le Pen and others associated with the French far right. Take Charles Maurras, a Catholic intellectual and father of extreme right French nationalism who laid the propaganda groundwork for French Nazi collaboration during World War II — an event he welcomed as a “divine surprise.”

Maurras then supported the Vichy administration which helped round up and deport 80,000 Jews and sent them to their deaths in concentration camps. He died in prison after the war.

The long-shunned author is enjoying a renaissance among the French extreme right. In May, Marion Maréchal-Le Pen spoke at the annual meeting of Action Française, a far right movement that dates back to the late 19th century which at one point had Maurras as its chief ideologue. She spoke approvingly of Maurras’ distinction between what he called “le pays légal” (the ‘fake’ legal country) versus “le pays réel,” the authentic country of the people.

It is an idea that has apparently filtered through to Bannon. “We are at the end of the Enlightenment. Have you read Charles Maurras?” Bannon recently asked a French official in Washington, according to a report in Le Figaro.

“I didn’t come to do insignificant things,” Bannon reportedly said about his war against the Washington “establishment.”

“Those people hate us, but we have the people. It is the legal country against the real country. And I am with the real country.”

In another report, France-Amérique magazine said Bannon’s interlocutor had been a French diplomat. It said he had revealed in the conversation that “Maurras was his guru….[and] According to Bannon, Trump represents the flesh-and-blood, natural, real country, pitted against the abstract, far-off, legal country.”

I sometimes get accused of excessive criticism of the Trump administration.  If anything, I’ve been far too kind.  It will take decades for the GOP to get rid of the stench associated with the events of the past 18 months.

A bad day for Bannon, Trump, Le Pen, and Russia.  A very good day for Enlightenment values.

PS.  I eagerly await the day when Ivanka does to Donald Trump what Marine did to her dad.

PPS.  Don’t know much about history.

PPPS.  Rodents, sinking ships, etc.

Vaidas Urba left me this comment after my previous post:

One more data point – South Tyrol (Alto Adige), a german-majority province in Italy is colored blue in the map.

That left me wondering about other evidence on this question.  So I looked at the percentage of residents with German ancestry, by state.  Here are the top ten:

Here are the unemployment rates for the top 10 states, in order:

2.8%, 3.4%, 2.8%, 3.1%, 3.8%, 3.1%, 3.8%, 4.5%, 3.8%, 5.0%.

The national rate is 4.5%, so those do tend to be low unemployment states.  But there are also states with small African-American populations, so I’m not sure if this is significant.  FWIW, my home state of Wisconsin (unemployment = 3.4%) does have significantly more African-Americans than states like Washington (unemployment = 4.7%) and West Virginia (unemployment = 4.9%).  And yet Washington has more high tech industries than Wisconsin.

Someone could do a multivariate regression with percent German ancestry and other ethnic groups as well to see if there is actually anything there.

PS.  South Dakota has a very large Native American population (nearly 10%).  I recall that the tribes in western South Dakota suffer from a lot of poverty.  That makes me surprised by their 2.8% unemployment rate.  Are Native Americans often counted as “not in the labor force”?