Jim Grant writes at Barron’s about an increasingly casual approach to monetary policy.
In finance today, comfort trumps propriety. As necks are tieless, so are earnings “adjusted.” As shirts are untucked, so are balance sheets encumbered. In the 21st century way of doing business, freedom of action is the beau ideal. Neither clothing nor rules should constrain it.
Has anyone noticed that the Federal Reserve is solvent again? Unlikely, as few realized that it was technically insolvent. …
… In the great cause of financial-institution safety and soundness, the Fed isn’t exactly leading from the front.
Does any of this matter? It used to. A currency once derived its strength from the integrity of the balance sheet of the bank that issued it—the more liquid that institution’s assets, the more plentiful its capital, the more confident the market could be in the ability of the money-holding public to exchange its currency for gold, and vice versa.
That was the classical, white-tie gold standard. Its dress-down successor, the Bretton Woods system, a gold standard much reduced in starch and rigor, died in 1971. Succeeding it is the paper-money, or blue-jeans, standard. The paper dollar owes its value to the say-so of the government alone.
Since 2008, the blue-jeans standard has given way to a kind of knee-ripped jeans standard—quantitative easing, ultralow interest rates, and nonstop “forward guidance,” along with the rest of the bag of worldwide radical monetary-policy tricks.
