Renee Haltom interviewed Richard Timberlake, perhaps best-known as a staunch supporter of fixed rules rather than government discretion for monetary policy, in Econ Focus, a publication of the Federal Reserve Bank of Richmond (First Quarter 2014, pp. 24-29). Here\’s a sample of Timberlake\’s views:
he argues that the Fed is inevitably subject to political influence.
\”Until maybe 10 or 20 years ago, economists who studied money felt that they could prescribe some logical policy for the Federal Reserve, and ultimately the Fed would see the light and follow it. That proved illusory. A central bank is essentially a government agency, no matter who “owns” it. The Fed’s titular owners are the member banks, but the national government has all the controls over the Fed’s policies and profits. And as with all government agencies, the Fed is subject to public choice pressures and motives.\”
If the Federal Reserve followed a firm rule, he argues, asset bubbles would be unlikely.
The Fed shouldn’t pay any heed at all to asset bubbles. If it followed rigorously a constrained price level, or quantity-of-money rule, I don’t think there would be bubbles. Markets would anticipate stability. Markets today, however, anticipate, with good reason, all the government interventions that lead to bubbles. If we had a stable price level policy and everybody understood it and believed it would continue, there wouldn’t be any serious bubbles. We don’t even know whether the 1929 “bubble” was even a bubble, because after the Fed’s unwitting destruction of bank credit, no one could distinguish in the rubble what was sound from what might have been unsound.
If lender of last resort services are needed, he argues, the private sector could provide them.
Private institutions will always furnish lender of last resort services if markets are free to operate and if there are no government policies in place that cause destabilization. In the last half of the 19th century, the private clearinghouse system was a lender of last resort that worked perfectly. Its activities demonstrated that private markets handle the lender of last resort function better than any government-sponsored institution.
The overall impression from the interview is that Timberlake is open to a variety of monetary rules, as long as the rules are written in stone. He offers positive remarks about a gold standard, about a monetary policy focused solely on the price level, and a monetary policy that would involve a fixed rate of growth in the money supply. As one example, he cites discussed his reaction to the rule Milton Friedman proposed in the 1970s for a fixed rate of growth in the money supply.
\”Friedman recommended a steadily increasing quantity of money — that is, bank checking deposits and currency —between 2 and 5 percent per year. Prices might rise or fall a little, but everybody would know that things were going to get better or be restrained simply because the Fed had to follow a quantity-of-money rule. I wrote him a letter at the time and remarked, “I agree with your idea of a stable rate of increase in the quantity of money, and I suggest a rate of 3.65 percent per year, and 3.66 percent for leap years — 1/100 of 1 percent per day.”
I can feel the pull of Timberlake\’s view, swirling around my ankles, but I am not persuaded. When you lash yourself to the mast, as Odysseus did to resist the call of the Sirens, you are indeed constrained from giving in to temptation. But if an unforeseen problem arises while you have lashed yourself to the mast, you are incapacitated from dealing with the problem. As Timberlake readily concedes, having the Federal Reserve surrender all discretion is not at all likely. Thus, the pragmatic questions are about what kinds of constraints on the Fed, including a continual process of transparency and self-explanation, are most useful.
As a coda, Timberlake has a nice story about Milton Friedman offering him some key advice when he was a graduate student.
I recall the time when I presented a potential Ph.D. thesis proposal at Chicago to the economics department. The audience included professors and many able graduate students. I could feel that my presentation was not going over very well. After the ordeal was over, Friedman said to me, “Come back up to my office.” When we were there, he said, “The committee and the department think that your thesis proposal has less than a 0.5 probability of acceptance.” I knew that was coming, and I despondently replied that I had had a very frustrating time “finding a thesis.” My words suggested that a thesis was a bauble that one found in a desert of intellect that no one else had discovered. It was then that Milton Friedman turned me around and started me on the road to being an economist. “Dick,” he said, “theses are formed, not found.” It was the single most important event in my professional life. I finally could grasp what economic research was supposed to be.