The Federal Reserve monetary policy was largely responsible for the Financial Crisis of 2008

Rebuttal: The Gold Standard: Pro seems to imply that he would prefer a system that uses the gold standard instead of a system that relies on fiat money and the Federal Reserve. However, subsequently after abolishment of the gold standard in 1933, the volatility of the money supply has decreased and recessions and depressions have also decreased. As my US historic inflation chart shows, peaks in inflation and deflation occurred frequently under the gold standard. A history of American recessions and depressions demonstrate that there were many depressions and recessions that occurred under the gold standard which was far worse than the recession of 2008. The problem with the gold standard is that the money supply can increase or decrease based on random factors: technological changes, and the discovery of new reserves. For example, if the technological advancement of extracting gold from the sea water can occur, then one would see a rapid increase in the money supply, despite the potential gdp of the economy changes [1]. Spain suffered an economic disaster due to an increase in supply of gold, but without an increase in goods or services. [2] Furthermore, if mining technology cannot keep up with the gold standard, then a deflationary problem would arise. As stated previously, the Great Depression was the result of the contraction of the monetary supply. A model of changes of the money supply occurring based on stochastic processes is a poor economic model and would result in greater volatility in the business cycle and money supply, as empirical evidence demonstrates. Falling interest rate: Pro goes on to state that the Federal Reserve caused the interest rate before. However, it should be noted, as I stated previously, that the Federal Reserve can only target the interest rate. This is also only for the short-term and there are other factors that contribute to falling interest rate besides the Federal Reserve. An increase or decrease in demand for money would also cause the federal fund rate to change. It should also be pointed out that the federal fund rate is different from other interest rates: home mortgage rates, long-term interest rates, and so forth are not the same as the federal fund rate, and are significantly higher than the federal fund rate due to the increase in risk and longer departure from liquidity, while the federal fund rate is the rate banks charge each other for borrowing overnight. So a real negative federal fund rate is not too uncommon. It has happened previously in the past. It has happened twice in the 70s and was near zero during the 90s. In 2005, the federal fund rate increased back to a real interest rate of 2%. However, how would one prove whether the interest rate is too low? As I previously stated, If the Federal Reserve was increasing too much liquidity and setting short-term interest rates too low, then there would be predictable results. The increase in the money supply would follow through an increase in inflation. Borrowers, knowing that inflation means greater cash flow in the future, would increase their demand for money, thus causing the nominal interest rate to rise. Thus if the short-term interest rate were too low, we’d expect inflation levels to rise and the nominal interest rate to rise. However, neither of these two events occurred. Instead the Great Recession followed a lowering interest rate and a lower inflation level. Since the effects of what would be expected from a policy of too much liquidity or too low of an interest rate did not occur, there is no evidence that the Federal Reserve had a policy of too low of an interest rate. There were legitimate cases in which Central Banks kept interest rates too low for too long. For example, the stagflation of the 1970s, in which the interest rates had to rise in order to contract the money supply. In Zimbabwe, central banks kept on expanding the money supply leading to hyperinflation. However, the financial crisis of 2008 does not resemble any of these two events. The amount of money that increased was not unprecedent either. While there was an increase in the money supply in 2001, the rate of the money supply growth rate lowered after that. Housing: Pro goes on to state that the lowering of the interest rate caused people to go onto housing. However, he does not explain why the lowering of the interest rate would cause the housing market to be targeted. If the economy was truly overheated, then all markets should be overpriced, not just housing. However, instead what he does do is state some of the psychologically reasons why a bubble formation would occur, which actually favors my position. The “lifelong dream of owning a home” is certainly a valid reason why housing caused a bubble. The federal government encouraged the process through the “Community Reinvestment Act”. Arguments extended: PRO has not responded to many of my initial arguments. Let me extend them. Some of them were reiterated in the rebuttal, but let me go over them: #1) the crisis does not resemble a monetary phenomena #2) The Federal Reserve can only target short-term interest, and cannot set long-term interest rates. #3) Monetary policy effects both the interest rate and inflation rate If there has been an increase in liquidity, then there should have followed an increase in inflation #4) Inflation is not inherently bad As stated previously, unpredictable inflation is bad, but predictable inflation isn’t inherently bad. #5) The federal reserve kept prices stable Prior to the federal reserve and the gold standard, prices had more volatility. #6) Recessions and Depressions occurred and were much worse before monetary policy and Keynesian policy was developed #7) Economic bubbles form without monetary explanations As stated previously, economic bubbles have been replicated in experiments using real money. There are also many psychological and behavior explanations which explain the formation of economic bubbles. Conclusion: Pro has not demonstrate that the recession of 2009 was caused due to monetary phenomena. The effects of what one would expect from the Federal Reserve setting interest rates too low is not what actually occurred. The Gold standard and decentralized banking have demonstrated, based on both theory and empirical evicence, to be poor monetary policies. . http://www.marineinsight.com... [1] . http://www.straightdope.com...[2]