Most people call it regulation?

Former Fed chairman Alan Greenspan appeared on the Daily Show with Jon Stewart yesterday proving once again that monetary policy is not very funny.


The exchange about punishing savers by lowering interest rates and encouraging ordinary working people to invest in stocks ("play craps" like hedge funds) was pretty good.

This explanation for why the central bank exists was interesting as well:

Stewart: I always wonder... Many people are free market capitalists and they always talk about free market capitalism and that is our economic theory, so why do we have a Fed? Wouldn't the market take care of interest rates and all that? Why do we have someone adjusting the rates if we have a free market society?

Greenspan: You’re raising a very fundamental question.

Stewart: I am? Should I leave?

Greenspan: No. Stay for a while. Since you got your Emmy, you’re qualified.

Stewart: Thank you very much.

Greenspan: You didn't need a central bank when we were on the gold standard which was back in the 19th century. And all of these automatic things would occur because people would buy and sell gold and the markets would do what the Fed does now. But, most everybody in the world by the 1930s decided that the gold standard was strangling the economy and universally the gold standard was abandoned. But, we need somebody to determine, or some mechanism, how much money is out there because remember, the amount of money relates to the amount of inflation in an economy.

Stewart: What are you? Sure I know that. I live by it.

Greenspan: In any event, the more money you have relative to the amount of goods, the more inflation you have and that's not good.

Stewart: So we're not a free market then. There is an invisible, benevolent hand that touches us.

Greenspan: Absolutely. You are quite correct to the extent that there is a central bank governing the amount of money in the system that is not a free market and most people call it regulation.

So, there are at least two forms of regulation that the former Fed chief advocates - limitations on the amount of mortgage debt GSEs (Fannie Mae, Freddie Mac, etc.) can hold and controlling the money supply that, conveniently, is no longer reported by the government.

Here's the reconstructed M3 money supply as maintained at NowAndFutures.com.
Yikes! Doesn't too much money lead to inflation?

The BLS just reported that inflation from year ago levels was only two percent. Where's that other ten percent of new money going? And why is the price of gold soaring?

Something doesn't add up here.