Donald Byrne's argument on market competition and Federal Reserve relevance

New Economic

Donald Byrne's New Economic Paradigm

Discuss Dr. Donald Byrne's assertion in his " New Economic Paradigm" that increased market competition reduces inflationary bias and makes the Fed much less relevant.

Although the business press may popularize the Federal Reserve as a kind of mythical institution that possesses great power over the world markets, the Fed only influences the economy very indirectly. "With the exception of the discount rate, the Fed does not administratively set interest rates," but only influences these rates by indirectly affecting the supply and demand for credit at lending institutions. (Byrne, Dec 2003) The Fed's influence lies primarily at "the short-term end of the maturity spectrum" in selling government bonds through open market operations, "where they buy and sell securities in the open market through a couple of dozen independent dealers." (Byrne, 2003) Thus, the Fed buys and sells securities in much the same manner as the ordinary trader would, not some economic demigod. (Byrne, Nov 2003)

According to Donald Byrne, the Fed's use of the discount window has shrunken to supplying legal reserves for bank's changes in seasonal demand, to prevent bank runs. This means that changes in the discount rate really have a mostly "symbolic importance having virtually no operational impact on the system." (Byrne, 2003) Also, since the dominant form of real money in the economy consists of checkable deposits, it means that the private sector creates most of the money for the legitimate part of the economy, not the federal government.