Re-Decentralizing the Fed

Financial circles are buzzing about Janet Yellen’s nomination to take over as Chair of the US Federal Reserve. But they are largely ignoring another, more fundamental question: How much discretion should the Fed be given to conduct daring monetary-policy experiments like the vast quantitative easing of the last five years?

BOSTON – Financial circles are buzzing about Janet Yellen’s nomination to succeed Ben Bernanke as Chair of the US Federal Reserve. But they are largely ignoring another, much more fundamental question: How much discretion should the Fed – indeed, any central bank – be given to conduct daring monetary-policy experiments like the vast quantitative easing conducted by Bernanke’s Fed over the last five years?

There is, of course, a role for bold experimentation. Many of life’s most important decisions are ultimately blind leaps, and accepted solutions often turn out to be wrong. For example, alcohol is now considered an inefficient method for cleaning wounds, because it kills infection-fighting white blood cells. In fact, venturesome trial and frequent error have driven human development.

But experience has repeatedly demonstrated that, when it comes to government institutions, unchecked audacity is almost never desirable – and, in some cases, can be highly destructive. Mao Zedong’s rash decree in 1958 to eliminate China’s “pestilent” sparrows led to the proliferation of grain-eating locusts, diminishing yields and contributing to a famine that led to more than 20 million deaths.

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