The Fed’s calculation problem

An insightful thought regarding the Federal Reserve:

There are better and worse ways to manage the Federal Reserve, but most are a matter of luck and hindsight. As economist Marc Faber has written, “When…the public…finally realizes that central bankers are no wiser than the central planners of former communist regimes, the tide will turn and monetary reform will come to the fore…. market forces [will] drive economic activity, and not some kind of central planner….”

I’ve always thought highly of Marc Faber, but this is brilliant. What he’s pointing out is that the Economic Calculation Problem developed by Mises and refined by Hayek applies to the central banks just as it applied to the socialist central planners of yore. This assertion, which rests on a widely accepted economic concept, can be readily supported by both logic and empirical evidence and amounts to a powerful refutation of the very concept of central banking.

The important thing isn’t the Fed’s ability or inability to completely enforce its target price of money, but that it can’t possibly know the intersection of the independent valuations of money set on a dynamic basis by the various buyers and sellers any more successfully than the Soviet planning boards could identify that intersection for the various consumer goods they managed. Therefore, its actions will inevitably be incorrect no matter what it does, notwithstanding the occasional blind luck.