Re-Decentralizing the Fed

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.

America’s system of government imposes particularly strict constraints on officials’ actions, reflecting a deep-rooted skepticism of philosopher-kings. Its political institutions are based on a carefully calibrated system of checks and balances, which, by enhancing accountability, helps to control the misjudgments and self-dealing of those in power. Where beliefs and interests diverge, America’s system favors open debate that accommodates a wide range of views. After all, people are more willing to consent if their dissent has been heard.