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David Stockmans Contra Corner
Why We Don’t Need No Stinkin’ FOMC, Part 3

Why We Don’t Need No Stinkin’ FOMC, Part 3

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david stockman
Sep 01, 2023
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David Stockmans Contra Corner
Why We Don’t Need No Stinkin’ FOMC, Part 3
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The one decisive reform that is needed is to jettison the FOMC and all activist day-to-day Fed intervention in financial markets and return to a passive discount window modality. That shift and that shift alone would rescue the Fed from its captive status deep down in the bowels of Wall Street.

To be very clear, under this alternative monetary regime the banking system could get liquidity when it was needed, but only at a penalty spread above a market-driven floating rate at the Fed’s discount window. Under a revived Glassian model the money market, not the FOMC, would set the discount rate based on the supply of savings and the demand for borrowings. And the discount window would be open for business one commercial bank-borrower at a time, day in and day out.

That is to say, there would be no monthly Fed meeting drama endlessly amplified by financial TV about the Fed funds rate and level of bond-buying. Nor would there be a massive concentration of bets (i.e. front-running) around the Fed’s expected action because policy-action would be delivered in tiny fragments and via continuous pricing bits at the market-driven discount window, not via a “breaking-news” flash on bubblevision ten times per year.

Moreover, the remit of the Fed under the Glassian model would be strictly limited to support for commercial bank liquidity. Period. The private economy would take care of growth, jobs, and the other elements of GDP. And White House bullies like LBJ and Donald Trump could huff and puff at length about easier money, but to no avail because there would be no FOMC or monetary politburo to heed their wishes.

At the same time, there would be no financial bubbles or main street goods and services inflation, either. That’s because the mechanism by which the Fed fosters financial bubbles and CPI inflation—artificially low interest rates and inflated financial asset prices—would be disabled.

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