The Intellectual Roots of “Mondustrial Policy”
In early 2009 at the AEA meetings, Stanford economist John Taylor, used the term “Mondustrial Policy to criticize the Fed and Treasury response to the financial crisis. Taylor, as quoted in a WSJ bolg post by Jon Hilsenrath (http://blogs.wsj.com/economics/2009/01/05/the-feds-outspoken-critic/, used this “unflattering term” to describe a policy environment that was “not a monetary framework. It is an intervention framework financed by money creation.”
In a paper I presented at the recent Austrian Scholars Conference, “Hayek’s Relevance for 21st Century Boom-Bust and Recession-Recovery” I wrote:
”With this second bust, unlike the first recession of the 21st century, the real economic slowdown was accompanied by a significant financial crisis and if not a public panic, definitely a policy panic. Policy makers feared that the financial crisis would lead to a collapse of the banking and credit system. The fear was deflation. The model was monetary events of 1929 to 1932. The Fed and the federal government responded with an unprecedented bailout of both financial and non-financial firms with the creation and use of new monetary policy tools and Fed-Treasury coordination accompanied by aggressive use of more traditional policy instruments (Ducca et al 2009). The result has been a massive expansion of the Fed’s balance sheet as well as massive re-structuring of the type assets held by the Fed. The picking of winners and losers has moved the Fed very close to a policy which is even more dangerous to liberty and prosperity that an ordinary fractional reserve banking system supported by a central bank; a mondustrial policy; monetary policy as an agency not only of irresponsible fiscal policy, but of industrial policy as well.”
In a very interesting and important paper published in the Independent Review, “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner”, Jeffrey Rogers Hummel provides, without explicitly mentioning the term, the intellectual foundations for a “Mondustrial Policy”. Hummel builds his case by illustrating the significant differences in “approaches to financial crisis” between the Bernanke approach and a Friedman approach. In addition to exposing the theoretical foundation of this misguided and dangerous policy, Hummel provides a very detailed almost step by step use of this type of policy in response to the major events of the recent crisis. A must read for anyone interest in the minute details of how and why the Fed balance sheet expanded so significantly and how much of what was done did not and does not show explicitly in ‘regularly’ reported monetary aggregates, their sub components or Fed balance sheet reports.
He argues the differences have been rarely noticed, perhaps because Taylor’s warning went unheeded within mainstream commentators, but he correctly summarizes the impact as “those differences resulted in another Fed failure – not quite as serious as the one during the Great depression, to be sure, yet serious enough – but they have also resulted in a dramatic transformation of the Fed’s role in the economy. Bernanke has so expanded the Fed’s discretionary actions beyond controlling the money stock that it has become a gigantic, financial central planner.”
It should be clear, that this failed policy response to the current situation has set up future monetary conditions that may be very difficult to unwind without significant inflation and/or a continuing boom-bust pattern. We have again reached the point per Garrison where we have Hayek’s “tiger by the tail”.