http://www.reuters.com/article/2012/...82J17A20120320

I think it's pretty cool that the chairman of the fed is even talking about this. Seems to be his line is basically that the fed couldn't do it's job if there were an objective value for a dollar. There apparently is enough rancor out there about it that he feels compelled to address it, however. I think that's a good thing.

Comments?

misquote?

However a Gold Standard is effectively price fixing. That does not work, and that's the main reason it is a bad idea imo.

Not really. It's simply using a different form of currency, not price fixing.

OP, I agree with you that it's cool that he is even addressing it.

Couldn't a central bank technically still do pretty much the exact same kind of monetary policy under a gold standard though? That is, if at all times they held excess gold reserves, and then release them when they need to ease and accumulate when they need to put the breaks on? Only difference is, this would put a ceiling on the amount of easing they could do.

most gold standard have been price fixes. the major problem comes from the fact that they typically dont restrain fiduciary media growth entirely, so its not a full reserve standard, and trying to maintain initial fixed ratios with gold becomes unsustainable overtime.

There is no need to stabilize the economy. When the economy enters into a depression it is because resources have been misallocated to capital goods industries as a result of bank credit expansion confusing entrepreneurs about how much savings is occurring (interests rates being determined on the market by consumer savings). During the depression these resources are reallocated to consumer goods industries. Efforts to prevent this reallocation are bound to exacerbate this situation.

Oh no! The fed cant intervene in the economy with a gold standard? How awful.

That would solve the problem.

From my rudimentary understanding of economics and the gold standard, the primary appeal of a gold standard is that it forces fiscal discipline upon a society. When "money" is backed by a scarce commodity (such as gold) nations and their leaders are forced to live within their means. Politicians can no longer "buy" votes by printing money. The downside of a gold standard is that it limits the ability of a nation to respond to certain types of crisis, such as war or a depression, where the ability to "temporarily" increase spending (and/or borrow money) is required.

A nation can function without a gold standard as long as politicians and public officials behave responsibly. The problem starts when politicians (and their constituents) begin adopting reckless spending as the norm.

It's very entertaining (in a sick and perverted sort of way) watching Chairman Bernanke testifying before Congress. In a weird rendition of kabuki theatre, Chairman Bernanke warns the pols that current entitlements and current spending are "unsustainable" and Congress must get its fiscal house in order - meaning "Cut, cut, cut!" The Congressmen and senators stare right back at Mr. Bernanke and effectively say, "Please save us from ourselves, Mr. Chairman!" Not particularly interested in slashing their own throats by imposing austerity on their constituents, most of our elected representatives want Mr. Bernanke to solve the problem. It's fairly obvious from his demeanor and his blank stare that Chairman Bernanke knows where this train is headed. Sooner or later the bond vigilantes will get fed up and there will be a crisis in the financial markets. Our creditors will start demanding higher payment for agreeing to take on our debt, thus forcing the Fed to raise interest rates. That is what Ben Bernanke is hoping to avoid - and why he keeps pleading with our elected representatives to be responsible. So far, his pleas seem to be falling on deaf ears. I'm no expert, but I sense that our politicians will not act - in any meaningful way - until a gun is (figuratively) put to their heads. There's no easy way out of this mess.

Former DJ

It actually is.

That's very reminiscent of the situation in the Eurozone now (and in the past year or two).

BTW, Gold standard wouldn't prevent government borrowing--people can still lend gold coins to each other, so there's nothing preventing the government from borrowing either. The main thing that's prevented is the printing of money by the Treasury. The Federal Reserve could actually do what it does with a gold standard, but it might not be as effective.

Haven't read the article but Bernanke wrote many papers about this subject during his academic career so it doesn't surprise me he's talking about this. I've used a few in papers I've had to write.

Not so much price fixing but exchange rate fixing is one of the main reasons he's against it IIRC.

it only begs the question... why he is in favor interest rate fixing?

he once gave Paul an answer during a Q&A which amounted to saying its necessary because prices are sticky. Oddly enough, this dates back to an argument Hayek made in that labor unions artificially raising the price of their work could technically be combated with inflation via money's illusory effects.

I've written about this before:

For unanticipated monetary injections, sure. Even then there's an unanswered question in that writing, and that is "How fast does the economy adjust, and what are the effects of a short versus long adjustment period"? Or more specifically, one needs to examine deeper how the money circulates unevenly.

For anticipated monetary injections, the answer isn't nearly as neat as outlined in the quote. If something is anticipated (and one could argue that most modern monetary policy can easily be predicted--and except for QE has been done slowly and gradually), then the discovery process can be immediate. No need to wait for the extra money to happen to show up in a certain market to know that prices should adjust. We would know that the money supply has been inflated and could make immediate changes.

I agree with the statement, but disagree wholeheartedly with the (implied) conclusion. I don't think that if it turns out that we can't do something "perfectly" that means we ought to do nothing. If we can make things better, I believe we ought to do so. Even if that isn't getting to "perfect". Sometimes second-best solutions should be adopted, even knowing it isn't optimal.

Agree completely. Since Volcker, the Fed has made sure to signal heavily what its intentions are well in advance of actually carrying them out. I think I'm missing something though. Is the relation between using interest rates to fight artificially fixed prices and using them to fight prices that are sticky up or sticky down the same?