Although likely intentional, I was surprised to not find any discussion of the "don't fight the FED" mantra and extensive financialization of the economy as being related to Central Bank excesses.
Thoughtful, comprehensive, and masterful. I will be using this essay in its final form when we get it in my money, banking and financial markets classes for the foreseeable future. I do not think anyone but you could have written this essay, John. Thank you for it.
Way too long and clearly in need of some rewrite which you have acknowledged.
My suggestion would be to just address what the role of the Fed should be in modern times and go from there. I dislike the dual mandate and view price stability as the only mandate the Fed should have.
As to accountability i wonder this: A Fed governor i believe is appointed for 14 years and cannot be fired ex for cause whatever that standard might be. That pushes back against accountability to some degree as Fed members can listen to and then ignore what any accountability body says to it.
Just finished Robert Hetzel’s The Federal Reserve: A New History. He ends his narrative in mid-2020, but this essay provides a great update, and could even serve as an additional chapter.
Hetzel wants more transparency at the Fed, and believes that one way to get it is by the use of a “model by committee” approach, pp. 606 ff. I’ve always viewed committees as no smarter than a flock of birds, so I was surprised to see that in an otherwise erudite discussion. But other than that one shortcoming I was not able to find much to disagree with.
Many thanks for your detailed analysis. Very helpful.
Does he discuss Bernanke/Greenspan dismissing elevated CPI from 2005-2008?? So in 2000 core PCE became the preferred metric for inflation and then in 2005 we started 4 years of elevated CPI that degraded lower class disposable income while the upper class simply bought shares of XOM and laughed all the way to the bank.
Not that I recall. But he does complain about the Fed’s lack of transparency and its history of using “discretionary” language to conceal past mistakes and support its black box approach to policy. That part joins nicely to Mr. Cochrane’s plea for better guide rails. The smoke and mirrors nonsense has got to stop.
Most people seem to have forgotten the elevated CPI that peaked at 5.6% in July 2008. That episode of inflation was much worse than post Covid because it wasn’t transitory due to a pandemic and the solutions weren’t very realistic because the solutions were Iraq producing more oil and Qatar producing more LNG for America to import!?! Can you imagine America importing LNG and the amount increasing every year through the 2010s and then in 2022 we find ourselves in the situation of AI needing huge amounts of new electricity generation?!?
At your urging, I did read on . . . "Our constitutional order does not countenance a completely independent agency that creates money to use as it sees fit. Fed independence is limited and constrained by accountability, a limited mandate, and limited tools. The question for us is how to restructure that overall package." Independence. Restructure.
Name one "agency" or organization, anywhere, at any time, that has performed under "limited" accountability, mandate or tools? Your thesis is failed from the start.
Even the Catholic Church has shown numerous times over the centuries such beliefs are a fool's errand. Anywhere you have humans involved, fallibility is voided. And anywhere you have politicians involved, it's guaranteed!!!
I humbly suggest you start with a clean sheet of paper, acknowledge the repeated failure of central planning, with the goal of allowing markets to do what they do faster, better, cheaper than inflated egos and outstretched hands serving anyone but their own ideology and interests.
The point you make about independence being mostly discretionary practice rather than a genuine rule is exactly the problem I’ve been working on in a different way. I’ve been developing something I call T theory, which shifts the focus away from interest-rate setting and onto the transmission of money into the real economy.
Instead of committees interpreting the cycle, the monetary base adjusts automatically according to measurable transmission conditions — whether new money is flowing into wages, productivity and output, or leaking into asset prices, inflation slippage and external deficits. Strong transmission means expansion; weak transmission forces tightening.
The aim isn’t a clever model — it’s to remove the discretionary element altogether and replace it with a transparent rule that can’t drift with political or institutional incentives. In that sense, a transmission-anchored base-money rule might deliver the kind of independence you’re arguing for: independence grounded in structure rather than reputation.
TLDR
"Central bank independence is not an absolute virtue."
Lost me right there, amigo.
Sometimes the rest of a paragraph explains an apparently puzzling first sentence.
Sometimes you set off on the wrong azimuth and never get to the right place. No amount of whipped cream can make bullshit into birthday cake, amigo.
Although likely intentional, I was surprised to not find any discussion of the "don't fight the FED" mantra and extensive financialization of the economy as being related to Central Bank excesses.
Ｗｈａｔｓａｐｐ➕𝟭↡𝟱𝟭𝟴↡𝟱𝟭𝟮↡𝟭𝟱𝟴𝟬
Thoughtful, comprehensive, and masterful. I will be using this essay in its final form when we get it in my money, banking and financial markets classes for the foreseeable future. I do not think anyone but you could have written this essay, John. Thank you for it.
Way too long and clearly in need of some rewrite which you have acknowledged.
My suggestion would be to just address what the role of the Fed should be in modern times and go from there. I dislike the dual mandate and view price stability as the only mandate the Fed should have.
As to accountability i wonder this: A Fed governor i believe is appointed for 14 years and cannot be fired ex for cause whatever that standard might be. That pushes back against accountability to some degree as Fed members can listen to and then ignore what any accountability body says to it.
Just finished Robert Hetzel’s The Federal Reserve: A New History. He ends his narrative in mid-2020, but this essay provides a great update, and could even serve as an additional chapter.
Hetzel wants more transparency at the Fed, and believes that one way to get it is by the use of a “model by committee” approach, pp. 606 ff. I’ve always viewed committees as no smarter than a flock of birds, so I was surprised to see that in an otherwise erudite discussion. But other than that one shortcoming I was not able to find much to disagree with.
Many thanks for your detailed analysis. Very helpful.
Does he discuss Bernanke/Greenspan dismissing elevated CPI from 2005-2008?? So in 2000 core PCE became the preferred metric for inflation and then in 2005 we started 4 years of elevated CPI that degraded lower class disposable income while the upper class simply bought shares of XOM and laughed all the way to the bank.
Not that I recall. But he does complain about the Fed’s lack of transparency and its history of using “discretionary” language to conceal past mistakes and support its black box approach to policy. That part joins nicely to Mr. Cochrane’s plea for better guide rails. The smoke and mirrors nonsense has got to stop.
Most people seem to have forgotten the elevated CPI that peaked at 5.6% in July 2008. That episode of inflation was much worse than post Covid because it wasn’t transitory due to a pandemic and the solutions weren’t very realistic because the solutions were Iraq producing more oil and Qatar producing more LNG for America to import!?! Can you imagine America importing LNG and the amount increasing every year through the 2010s and then in 2022 we find ourselves in the situation of AI needing huge amounts of new electricity generation?!?
Ｗｈａｔｓａｐｐ➕𝟭↡𝟱𝟭𝟴↡𝟱𝟭𝟮↡𝟭𝟱𝟴𝟬
Minor Typo: it's the Major Questions Doctrine, not the Major Doctrines Question.
Thanks!
At your urging, I did read on . . . "Our constitutional order does not countenance a completely independent agency that creates money to use as it sees fit. Fed independence is limited and constrained by accountability, a limited mandate, and limited tools. The question for us is how to restructure that overall package." Independence. Restructure.
Name one "agency" or organization, anywhere, at any time, that has performed under "limited" accountability, mandate or tools? Your thesis is failed from the start.
Even the Catholic Church has shown numerous times over the centuries such beliefs are a fool's errand. Anywhere you have humans involved, fallibility is voided. And anywhere you have politicians involved, it's guaranteed!!!
I humbly suggest you start with a clean sheet of paper, acknowledge the repeated failure of central planning, with the goal of allowing markets to do what they do faster, better, cheaper than inflated egos and outstretched hands serving anyone but their own ideology and interests.
I can't wait to read it!!!!!!!!!!!!!!!!!!!
Ｗｈａｔｓａｐｐ➕𝟭↡𝟱𝟭𝟴↡𝟱𝟭𝟮↡𝟭𝟱𝟴𝟬
The point you make about independence being mostly discretionary practice rather than a genuine rule is exactly the problem I’ve been working on in a different way. I’ve been developing something I call T theory, which shifts the focus away from interest-rate setting and onto the transmission of money into the real economy.
Instead of committees interpreting the cycle, the monetary base adjusts automatically according to measurable transmission conditions — whether new money is flowing into wages, productivity and output, or leaking into asset prices, inflation slippage and external deficits. Strong transmission means expansion; weak transmission forces tightening.
The aim isn’t a clever model — it’s to remove the discretionary element altogether and replace it with a transparent rule that can’t drift with political or institutional incentives. In that sense, a transmission-anchored base-money rule might deliver the kind of independence you’re arguing for: independence grounded in structure rather than reputation.
Outline here, if of interest:
https://open.substack.com/pub/renewingprosperity/p/the-transmission-coefficient?r=fw6q9&utm_campaign=post&utm_medium=web