Saturday, 1 September 2012

The Grumpy Economist: The future of central banks

Here's professor John H. Cochrane's, a monetarist of the University of Chicago and certainly no friend of Krugman (see here), take on the future of central banks. He writes,
But the Fed has crossed a bright line. Open-market operations do not have direct fiscal consequences, or directly allocate credit. That was the price of the Fed's independence, allowing it to do one thing—conduct monetary policy—without short-term political pressure. But an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials.
And on the Fed's current powers he explains,

It is the inevitable result of investing vast discretionary power in a single institution, expecting it to guide the economy, determine the price level, regulate banks and direct the financial system. Of course it will use its regulatory power to advance policy goals. Of course, propping up the financial system will affect monetary policy. If we don't like this sort of outcome, we have to break up the Fed into smaller agencies with narrowly defined mandates.
We certainly don't like "this sort of outcome" and would support a full break-up of the Fed as it currently is and eventually eliminate it all together.

Click the link below to access the article to read more about the Fed's dependency (that's right, not independence) and the ways the Fed distorts the markets.
The Grumpy Economist: The future of central banks: A WSJ Op-Ed . Here is a pdf for non subscribers: Momentous changes are under way in what central banks are and what they do. We are used t...

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