Quote from The Kin2:
The federal reserve should be a computer, increasing monetary supply at 2% per year.
Just imagine a world where interest rates are set by the demand for loans against available savings.
There's a lot of uninformed opinion around this site especially around economics. First off monetarism ala Milton Friedman failed miserably in the middle of the last century. It has been tried and it didn't work - controlling the money supply doesn't work and infact, it can't be done (international capital flows, globalisation, etc..) There's a lot more to Monetary policy and economic policy as a whole than interest rates.
When you set the interest rate the money supply is determined endogenously; you could say the price determines the demand and that supply is effectively inelastic and unlimited.
I'm not so sure the Fed has failed. I'd say the number one culprit for the housing bubble and virtually every other bubble is the American public; Joe Sixpack. The Fed's role has effectively become that of a babysitter - protecting the people from themselves.
It used to be that economic theory's justification for intervention in free markets was market failure, essentially protecting individuals from exploitation from firms, but that's obviously changed.
The problem lies with the attitude and mindset of a nation, something that's very hard to change. Things like the Marginal Propensity to Consume, Import and Borrow have got out of control and the Fed only has a very limited influence on these things. When someone loses their house because they took a loan that was beyond their means to pay, who should they blame? The bank to a degree, the Fed to an even smaller degree, but at the end of the day that person needs to bear the responsibility for taking a loan they couldn't pay.
The Fed right now is more focused on keeping the Financial and Banking system (on which housing obviously has a huge impact) stable, rather than fighting inflation which last I checked was under 3%. I can't say I disagree because they Fed only has limited control over the price of energy because of international demand. Higher rates would slow the economy and energy demand but what would be the effects of that on homeowners, banks, the financial system?
One thing we can be sure of is that Uncle Sam would screw up far worse than the Fed. You'd be giving the guy who has to pay the bills the ability to print and determine the cost of money.
