Asset bubbles in the financial markets tend to domino and create a boom and then a bust. The handling of the money supply is inevitably bound up in the panic (either by being too tight and precipitating the crises or by being too loose and precipitating the bubble). The more complex the system and the more personal judgment by a small group of individuals the more likely major misteps. We have an incredibly complex system with an incredibly small number of individuals handling the Fed. By defending the current circumstances as “pretty close to the best performance by any banker ever, public or private” you make my point stronger — the central bankers don’t do a very good job. Chaos, recession, government debt, unemployment, eviction, foreclosure, business and personal bankruptcy, loss of income, etc., and it is the “pretty close to the best performance by any banker ever, public or private.” We need a system with more constraints on the creation and contraction of the money supply (which would make the “Fed” or it’s successor more predictable — which in turn would make decision making by other actors in the system more rational and in line with reality (since they would know what the actual reality is as opposed to guessing at what the Fed will do)).
You think that instability in the objective exchange value of money is always caused by factors effecting its supply. Thus your statement "We need a system with more constraints on the creation and contraction of the money supply", believing that this alone would ensure full financial stability, eliminating all effects due to fluctuations in the objective exchange value of money.
But this is a flat error. *Two* factors determine the objective exchange value of *any* commodity, including money. Only *one* of them is the *supply* of that commodity. The other is the *demand* for that commodity. And the demand for money is *not* a constant. Fluctuations in the objective exchange value of money would occur, and did occur, whether the supply of money is fixed, or grows at a constant slow rate, or grows slowly, or meanders.
The primary fallacy of the entire position is the illusion that the demand for money is a constant. It simply isn't.
As a matter of pure microeconomics, instability due to fluctuations in the objective exchange value of money can only be damped if supply *responds* to changes in demand. A constant money supply is an inelastic supply, and in every commodity in existence, inelasticity of supply means *more* volatile fluctuations in price or exchange value, not less.
It is possible for monetary policy to do active harm by *driving* the ocillations in demand for money, if the supply of money is *contracted* whenever demand for it rises sharply. Although it was not truly appreciated at the time, this was the case under the gold exchange standard with an open economy in international trade. Thus, the US money supply was dropped 30% at a time when demand for money was soaring, in the great depression.
Similarly, it is possible for monetary to do active harm by driving oscillations in the demand for money, if the supply of money is *increased* sharply at a time when the demand for money is non-existent and falling, as in a rapid inflation. If a monetary authority increases money supply while an existing inflation is ongoing (as it will if e.g. it has a fixed real revenue target from new money issuance, and receives less real value from past issuance amounts as demand for money falls), then it can send money supply soaring while demand for it is evaporating, as happens in hyperinflations e.g. in Zimbabwe recently, or Brazil in the 1970s and 80s, or Germany in the early 1920s.
But, if the monetary authority reacts to changes in demand for money in the opposite sense, increasing supply when demand for money rises and reducing supply when demand for money falls, then it *damps* oscillations in the exchange value of money. Which would be *even more extreme* in the absence of that damping. From *demand* changes alone.
The demand for money, far from being a constant, is highly variable and cyclic. It falls in booms as men try to get out of money into other assets rising in price, and it rises in smashes as men scramble to get out of those assets and into money. They cannot in the aggregate succeed, even approximately, if the quantity of money in existence does not change. A million sell orders won't reduce the stock in existence by one share. A million sell orders for everything else are a million buy orders for money. It is the other side of every sell order.
Various actors will speak of any given course of money supply as being "too tight" or "too loose", but mean very different things by those characterizations. Someone who has bet on a rapid inflation by going short money on an epic scale, to hold hard or long dated assets, will think anything "too tight" that doesn't allow the prices of his favorite bubble assets to go on increasing or even accelerating, while letting him repay all his short dollar positions (loans, leverage, etc) with confetti.
"Too tight" in that sense is too tight relative to the bubble speculator's commitments. And the only thing loose enough to satisfy him, for very long, would be a hyperinflation. It is simply possible for men to take positions that are fundamentally incompatible with money continuing to hold any objective exchange value to speak of, at all.
In the past real estate bubble, very large numbers of people took on financial commitments that they could only have a prayer of meeting if the general price level and their wages, doubled, on a time scale of 3-5 years, and house prices continued to increase at double digit rates indefinitely. Anything loose enough for them, would mean dollars not holding any value to speak of for everyone else. A smash is *inevitable* once that happens. Their plans are *incompatible* with those of the men on the other side of their own trades, or with reality.
I understand that you think that any course of money supply that results in speculators speculating too recklessly, has been proven by that very fact to have been too loose. But men are free and folly is as old as Adam. There isn't a course of money supply that is incompatible with destabilizing speculation.
There is no substitute for sensible action by participants at *all* levels in economic action. End consumers must manage their own finances responsibly, or they are quite capable of ruining themselves, and involving everyone else in their mess. Producers must manage their activities efficiently, and they are quite capable of investing in the wrong activities, wasting capital, destroying it in the process, sucking up resources to no purpose. Financiers must manage their activities well, lending to sound operations and not to unsound ones, channeling capital to places with high returns, but also avoiding overdriving mere cycles by averaging and smoothing their expectations. And the monetary authorities have to measure demand for money accurately and respond to changes in it. The government needs to manage its finances responsibly, and not try to use the monetary system as a revenue source, nor try to enrich itself at the expense of the populace or economically vital sectors of it.
If anyone screws up any one of those things, they can crash the system for everyone. Doing so does set off restoring forces, but they take time to operate and their operation is intensely painful for all concerned.
The economic problem is a fundamentally difficult one, not a theorem of marginal calculus. The coordination of everyone's actions to a single trajectory for the overall economy is not a given, it proceeds by trial and error. Expecting perfection of it is unrealistic and conservatives are realists. Expecting booms and busts that have afflicted commerce since its dawn to just stop tomorrow because you don't like them, is utopian, and conservatives despise utopianism.
What we want from the monetary system is (1) an effective medium of exchange (2) some flexibility in response to demand and (3) some longer term price stability. Asking for an infinite amount of (3) doesn't give you (2) for free - on the contrary. We cannot rely on the monetary system to *also* solve the entire economic problem for us. That is *our* business, as consumers, producers, and investors.