In today’s Wall Street Journal, two Fed insiders Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, and John A. Weinberg, director of research of the Federal Reserve Bank of Richmond, effectively argue that central bank “actions that alter the allocation of credit … endanger the stability the Fed was designed to ensure.” Their explicit targets for criticism are the Fed purchases of mortgage backed securities and other “actions in the recent crisis” that “bore little resemblance to the historical concept of a lender of last resort.”
In my view they correctly recognize that while “these actions were intended to preserve the stability of the financial system, they may have actually promoted greater fragility.” They correctly assert “(w)hen the central bank buys private assets, it distorts markets”. Lacker and Weinberg are late to the dance.
Stanford economist John Taylor in 2009 coined the term “Mondustrial Policy” to criticize the Fed and Treasury response to the financial crisis. Taylor’s remarks are highlighted in a WSJ bolg post by Jon Hilsenrath. Hilsenrath reports that Taylor used this “unflattering term” to describe a policy environment that was “not a monetary framework. It is an intervention framework financed by money creation.”
Jeffrey Rogers Hummel in his important “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner illustrates significant differences in “approaches to financial crisis” between the Bernanke/Yellen approach and a Friedman approach. In addition to exposing the theoretical foundation of the recent misguided and dangerous policy approach, 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.
He summarizes, “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.” Lacker and Weinberg see the major problem associated with this monetary central planning as “undermining central bank independence.”John Taylor sees the cause of the problem as the Fed failing to follow a rules based policy.
Research by Selgin, Lastrapes, and White (“Has the Fed Been a Failure?” points in another direction. Central banking per se may be the problem. Contra Taylor, the Great Moderation was perhaps not as great a success for monetary policy as Taylor believes. The improvement was temporary and ‘appears to be due to factors other than improved monetary policy.” Selgin, Lastrapes, and White conclude, “the real hope for a better monetary system lies in regime change.” Austrians have a strong comparative advantage in discussion of what the foundations of this regime change should look like. Reform should go much further with a goal of sound money, not a goal of stable prices.
