re: How did monetary policy work before the Federal Reserve?

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Are you an economist

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Naw. I've had a lot of schooling related to quantitative finance, law & economics, & mathematics, but developing my own theories on economic history & monetary policy is just a hobby of mine.

Currently I work in model risk consulting to help investment banks keep the FRB & OCC off their backs. I can assure you, it's more boring than it sounds, and it was even more boring when I was a quant model developer. This EFC article from a couple of weeks back kind of sums it up: " I’m a quant in an investment bank. It’s not what you think."

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If you’re starting as quant today, you might think you’re going to be a trader. This isn’t that easy: instead of quants becoming traders, traders are becoming quants. It’s the traders who are leaning how to code, rather than the quants who are learning how to trade. While traders move into quant territory, us quants are getting lost in unexciting regulatory work.

Of course, there are some interesting quant jobs in investment banks. – Just not many of them. These jobs are the “desk quant jobs” – the quants who sit next to the traders and develop trading tools whilst interfacing with the core quant library.

In my opinion, the best quanting jobs now are (like most things), on the buy-side. If you’re starting out as a quant today, you should try to get into the quantitative fund space.

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shite, man, I keep trying to make a move to the buy-side, but I've kind of outkicked my coverage making too much doing what I'm doing now, and as boring as it is, I will hopefully have my student loans paid off by the end of this year. So I can't really complain.

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Do you have any thoughts on the effect on the economy and inflation if the government did away with the Fed?

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Yeah, and some of them were in the last couple of pages of that PT thread I linked to before. Firstly, "doing away with the Fed" can mean all kinds of different things, so that makes predicting what would result necessarily difficult. I gave arguments why I think a transition to a non-Fed system (plus an expanded FDIC and a "spillway" device for combating sharp deflation) could be done gradually, and would be much less economically disruptive than, say, Volcker's rate hikes in the early 1980s. I also now think that consumer price deflation and the loss of some short-term commercial paper and money market funds wouldn't be a big deal at all.

In my mind, inflation is a sort of tax (although not a terribly bad one, as far as taxes go), and one that hits people who happen to be stuck in long-term contracts or situations as the recipients of future fixed-rate cash flows. That tends to be a lot of people, but the even bigger problem is that the current system destroys macroeconomic efficiency. Near-ZIRP forms a sort of Venus fly trap, and central banks around the world are propping up rich people's stocks (and in many cases actually buying them directly) and other asset values, which is just not worth it anymore. If there are other better ways to avoid a 1929-1933 asset spiral, then why promote asset and price stability at the expense of economic growth? If what resulted after the dot-com bubble was the worst 16 years of performance in American economic history, then what was the point of having the Fed "rescue" anything? I supported TARP and short-term liquidity measures, but the rest is just not worth it. Better and more sophisticated monetary systems await us in the future.

That being said, the problem with most anti-Fed sentiment is that most proponents have swallowed absurd populist conspiracy theories that depart from reality, and which exaggerate the complicity of central banks in causing financial bubbles. Even without such exaggerations, however, I think we can do better without modern central banking, and the consumer price inflation targets and artificially manipulated low interest rate policies that it produces.

Just my two cents though.