What Do We Think About Sumner’s Proposal to Let the Fed Loose?

I just want to throw this out there and bat it around for thought experiment purposes.  Scott Sumner has written an interesting piece regarding the potential “simplification” of the monetary system whereby we “forget about banking” and just issue currency through the Fed.  He says:

“I’ve occasionally argued that we should simplify the monetary system.  Have the Fed simply issue currency, and adjust the currency stock to target NGDP expectations.  Forget about banking.

…

The central bank could be an agency that would regulate banks, set reserve requirements, do interbank clearing of funds, be a lender of last resort during banking crises, etc.  But not monetary policy!  If the Fed really wants to pay interest on the reserve balances, let them.  But then don’t let them do monetary policy.

The monetary authority would adjust the supply of currency to target the price level (Fama’s goal) or NGDP (the market monetarist goal.)  And most importantly that’s all they’d do.  There would be nowhere to hide when things go wrong, as in 2008-09.

…I’d love to see the monetary authority try to shove a few trillion in $5 bills down the publics’ throats.”

First things first.  This will never happen.  Never.  Why?  Because this is essentially handing over the power of the purse to the Fed.  The Fed’s position as protector of the banking realm is already controversial enough.  It’s one thing to have the banking system control the money supply through our market based system, but it’s a whole different matter to hand over control of the US money supply to 12 unelected guys who may or may not be qualified to be in that room to begin with.  But let’s go with this for a moment.

What are your thoughts here?  The good, the bad?  My initial reaction is basically – well, the Congress already issues money in a typically counter-cyclical fashion (automatic stabilizers) so if you wanted to peg NGDP to a spending target then why have a group of unelected guys allocate the money.  Why not just have Congressional spending or tax rates tied to NGDP in something similar to Mike Sankowski’s TC Rule?

Anyhow, I am just starting to wrap my head around this idea and it’s possible that I don’t even have my head wrapped around it entirely, but I wanted to throw it out there to be batted around….