End the Fed? Really?

Ending the Fed will result in the elimination of the business cycle.  Hmmm…let me think…NO!

Have there been any academic studies done with evidence in favor of the above?  I don’t think so.

To me, it is a question of two issues: firstly, causation, and secondly, of how one defines the degree of the Fed’s influence in the markets.

To answer the above questions consider the analogy I like to use where the Fed is equivalent to the Fire Department. 

Under such a scenario, the Fire Department spots forest fires and sends its helicopters to control the fire and where possible to put the fire out completely…Can one make the argument that ending the Fire Department will result in the elimination of forest fires?

Many will dispute this suggestion.

The critical assumption, actually, lies in that there is no way to determine/verify if the Fed is good at putting out fires…But what one can’t dispute is that the Fed is equivalent of the Fire Department and not, as the critics of the Fed claim, the arsonist!

So going back to the critical assumption, what if the Fed is actually not as good as it thinks, and that the real probability of helping at putting out fires is low?  Well then the question should not be whether the “helicopter” attempts at putting out fires should continue.  The question is: is the level of the Fed’s interference sufficient?  Moreover, what’s our assessment of its track record?

If we deem the Fed’s efficient/inefficient margin to be….. say….. 75%/25% (based on track record) en-route to the subsequent decision to keep the Fed or not, then even the slightest over-estimation of the Fed’s abilities will be better than no involvement at all.

So although claiming that the Fed actually starts the fires is a totally false assumption, however, the bare fact remains, if one is confident that the Fed cannot put out fires and its operations do not translate to great monetary gains, then there is no way to convince them otherwise.  Besides, there is really no way to compound the advantage of having the Fire Department at a forest fire.  One can always claim that the fire was fading or a potential storm would have or the self-organized operations by citizens on the ground were sufficient enough and there was no need for the Fire Department’s involvement!