John Cochrane on Hayek & Federal Reserve’s Independence?

When Hayek wrote his famous ‘The Constitution of Liberty‘ he admonished those who were naiveté to think that a Central Bank could be independent, especially in a political town like Washington.  Any brief look at the writings of Dr. Allan Meltzer will prove just how accommodating the Federal Reserve is to Presidential ambitions.  I’d even venture to admit that a fourth mandate has been implicitly granted to the Fed: keeping the occupant of the White House Happy.  This only contorts the dual mandate that is price stability, low unemployment, inflation and Presidential prerogatives.

Now that the Fed has four conflicting mandates, we can examine the role of benevolent govmint in the artificial expansion of credit markets:  bubbles!!

John Cochrane has recently admonished such insight while at the Hoover Institution at Stanford.  He wrote:  “the main task of the central bank outside its mandate is the guiding of the American economy through the setting of interest rates.  Their main tools of Open Market Operations consists of purchasing short term Treasuries and lending to banks.  This means that the Federal Reserves mandate was intrinsically linked to the maintenance of its political independence.  It was never to allocate credit!!”  It was supposed to conduct monetary policy independent of political pressure.  That’s now GONE!!

The Fed’s overtly accommodative policy has destroyed its independence, and therefore its political judgement!  The Central Bank now allocates credit to specific industries through the purchasing of private debt, the application of its Treasury purchases and other means of direct intervention.

Its now a political actor!

What’s the big deal?

Any look of both the political philosophy of the governing majority and the philosophical foundation of Keynesian craft and you’ll see a growing nominalism that destroys the moral foundation that is our social compact:  the Union.

John Paul II was right:  the end of the Cold War ushered in new threats to man, all from within the gift that is human freedom itself!

About William Holland

Systematic Theologian/International Relations
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