Vitaliy; welcome to the debate and thanks for those (certainly too kind) words. Let me see if I can address some of the points you bring up.
First however, it is necessary to understand the economic school of thought that we each stand behind or else we will simply be talking past one another and debating topics that have been debated for the past 100+ years. I for one am a student of the Austrian School of economics, which contrary to Keynesians (and the monetarist Chicago School as well) believes that active state (read: Federal) involvement in markets (for bread or for money) will always and forever lead to structural (1) misallocations of capital, (2) inefficiencies in the production, distribution and consumption of goods and labor, and (3) grossly perverted prices (read: inflation). Those are all fancy macroeconomic terms for "bad things". As in bad things happen when the government attempts to control free markets - again for goods, services, or MONEY.
I make this point all the time when I say that there is no difference (but in degree) between the apparatchiks in Russia who attempted to 'manage' the Soviet economy and the Federal Reserve which attempts (certainly to a lesser degree) to do the same thing. They both use monopoly power (printing press in the US, force in the Soviet Union) to alter the time preferences of economic actors to fit a pre-conceived notion, a notion I might point out that is entirely driven by politics, of what the economy should 'look' like in terms of growth cycles, wage rates, employment, spending, saving, etc. Central management of economies does not work when the experiment is grand (communism) nor when it is less so (socialism or, in the case of the US quasi-socialism). There is no debate on this point; the historical record proves as much and theory - at least Austrian Theory - provides exceptional insight into why this is so.
Having said all that, unless you were to read up on the Austrian Theory - via authors like Ludwig von Mises, Murray Rothbard, Eugen von Böhm-Bawerk, Frederic Bastiat, Richard Cantillon, Friedrich Hayek, Jörg Guido Hülsmann, Henry Hazlitt, Wilhelm Röpke, Jean-Baptiste Say, Carl Menger, Hans-Hermann Hoppe, Joe Salerno, and a host of others - it will be difficult for you to understand and accept why the above statement that "active state (read: Federal) involvement in markets (for bread or for money) will always and forever lead to..." is true.
But let me see if I can at least provide some grist as to why you might want to question the assumptions behind your statements.
"The inflation that we saw in the second half of last century was higher than ever before, but it was a consequence of transformation from a 'gold money' economy to the 'paper money'. "
Austrians believe that inflation is only a monetary phenomenon: that is, it can only take place when the state intervenes in markets and creates paper (fiat) money. I personally believe, as an adjunct conclusion derived from my complexity theory of asset pricing, that the Austrians are missing an important part of what makes inflation a reality: collective psychology. So to me, the historical evidence along with the Austrian and Complexity theories, suggest there is both (1) a structural element to inflation (the printing press and the state's monopoly on creating money) and (2) a collective psychological basis in inflation. The latter being a function of how a group of economic actors can and do change their collective time preferences - taking on more risk via increased time preferences (inflation) or conversely shedding risk via decreased time preferences (deflation). For reasons that are detailed, these two factors - structural and collective psychology - interact in both positive and negative feedback regimes thus creating cascade effects where inflation (and deflation mind you) can get out of control. The Kondratieff Cycle is the most famous result of this interaction. Yes, cycles of deflation and inflation have existed for millennia, but they are worse when the state is involved (from Rome to Weimar Germany to the United States). Austrians refer to this as the boom-bust cycle.
"Gold standard was dropped by US Government, arguably not by Federal Reserve.."
The Federal Reserve IS the US government. To suggest that the Fed is NOT a political body and is NOT influenced by either the political process or by elected officials is simply not to be aware of the institution's origination or its history in the development of US banking and capital markets. I would encourage you to read two books to appreciate this fact: A History of Monday and Banking in the United States by Murray Rothbard and Maestro : Greenspan's Fed and the American Boom by Bob Woodward.
"i.e. inability to provide liquidity when it is needed it the most."
"Providing liquidity" is a canard that has been used by politicians from Cicero to Bush. Don't believe it. Read Murray Rothbard's "America's Great Depression" for a line-by-line accounting of the Fed's balance sheet during the great depression to understand just what "providing liquidity" can do to an economy. And if you want to save some time, simply consider what happens to a gambler's risk preferences if he were to receive pocket's full of money every time he went bust. Common sense (and studies from behavioral economists) dictates that he would alter his risk-taking behavior, taking on riskier bets with lower payoffs. Now multiply that by 295 million people. The term for that is moral hazard. The market, somehow for millennia before the Federal Reserve was introduced in 1913, provided ample liquidity to businesses and consumers. And study upon study has proven that recessions and depressions before 1913 in the United States were both shallower and shorter in time frame than those after 1913.
"As long as inflation is stable and thus predictable, businesses price in inflation into their business plans and the economy keeps on going like the Energizer bunny."
Inflation is a hidden tax. It incents risk taking behavior at the cost of risk averting behavior. It rewards spending and penalizes saving. It literally takes money from the pockets of the poor and middle class and places it in the hands of the owners of capital (often, of course, the rich). Inflation is not benign. Inflation is robbery. Let me say that again for emphasis: Inflation is robbery - state sponsored robbery. And just like a little robbery is unacceptable, so too is a little inflation, whatever the purported benefits (and I would note that the link between inflation and economic growth are specious at best). It is no coincidence that all major wars in the last 300 years have been preceded by massive inflation. Why? Because inflation decimates the middle class and polarizes societies until they either fight amongst themselves in civil war or turn their attentions outward to 'foreigners'.
"The Fed in part is probably responsible for that [housing] bubble, but after 9/11 attacks and the blow up of the tech bubble, the Fed was forced to low[er] rates to prevent economy from slipping into recession."
Why were they "forced"? Do you believe that every single company, investor, and consumer should be saved from the consequences of their actions? At any given time economic actors are going to make errors in judgment. They are going to buy Yahoo at $225. They are going ot buy too many Cisco routers because they believe that their company's extranet will yield a return on investment in the mid teens. People are going to lose their jobs and lose some or all of their money. They are going to make mistakes. Is it the Federal Government's responsibility to protect them from those judgment errors? If so, I think you might want to think about the end result of that policy. After all, you say that the Fed was "forced" to reflate after the technology bubble. But the Fed was in large part responsible for that technology bubble. Herbert Spencer once wrote that "the ultimate result of shielding men from the effects of folly is to people the world with fools." The Fed's desire to protect people from the consequences of their actions has only created more risk, not less. With each subsequent 'reflation' they have created more moral hazard and thus caused greater misallocations of capital. And because the Austrian theories I described earlier suggest that it is impossible for the Fed to "manage" the economy in this way, such serial reflations will end - without question or debate - in a catastrophe.
"The economy is a very complex mechanism, thus any action by the Federal Reserve is bound to have unintended consequences. But bubbles happened through out history with or without the Fed's interference, they are just a fact of life."
Yes, as Kondratieff suggested, the crowd - societies - wax and wan optimistic and pessimistic. They create cycles of inflation and deflation. They create bubbles. But the greatest bubbles in history and thus the most destruction of capital - of life and limb - has come when the structural elements of that underlying cycle are magnified by the involvement of the government. Booms are more 'boomy'. And busts are much more 'busty'. And the middle class and poor get screwed on both sides.
I have never written this publicly before but I think after reading the above, you can understand why I believe the Fed is an amoral institution.
They rob people. And you cannot defend that.
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