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Comment by acd | Hacker News Reader

Economist believe in the free market as long as its not the price of new money ie the interest rate. Then most economists believe in that a central planned system is better via central banks. That is strange to promote that the free market is best in one way but not pricing another goods.

I think that central banks manipulation of the interest rates are creating the boom and bust cycles. Like Hayek and Austrian economics. When the price of new money is wrong it will be wrongly allocated which in turn creates economic bubbles.

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Purely private money doesn't really work so well, because you can't really believe it'll be worth anything tomorrow.

Now, what the Austrians have right is that overly out of whack money supply is pretty bad, and no central body can really do that good a job at guessing right. But instead of throwing the baby with the bathwater, what can be done is to give the fed a mandate that directly lines up with something we want.

For instance, we could have a fed that alters the money supply looking straight at NGDP. A stable NGDP growth is extremely valuable, as it's the best approximation we have of economic health. So if the Fed targetted NGDP growth, and used markets due to their forward looking nature, we'd get a better policy overall, without really risking the instability that comes from having money that can't really be trusted.

>I think that central banks manipulation of the interest rates are creating the boom and bust cycles.

Boom and bust cycles have happened throughout human economic history, well before central banks. Take a look at the FRED data on recessions and tell me if the economy avoided such fluctuations pre-Fed.

Central banks do control interest rates and the reason this is done is to try to dampen boom and bust cycles.

However, there's no right or wrong price of money. A price that's good for most of the "real" economy (seen in unemployment rates) is not so good for deflating speculative investments. Similarly, a price that's good for Germany is not good for Spain.

Letting the market decide the price will choose a price. Whether it's the right price depends on your perspective. There's no reason it has to be the right price or even a stable price; see Bitcoin for example.

The thing is there is not a clear way to have a market control the creation of new money - the choice is between central control of the money supply and a fixed money supply.

I wouldn't say that - private banks create new money whenever they issue loans (ie. all the time).

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