The biggest advantage of market monetarism is political
“Civilization advances by extending the number of important operations which we can perform without thinking about them.” – Alfred North Whitehead
Thought is scarce; political thought especially so. A few hundred people are tasked with running the entire country, and thousands of issues, few of which they properly understand. No one can even make a pencil. The amount of specialized knowledge required to successfully implement the goals of government are simply not within the capacity of a mere few hundred human beings, no matter who those people are. One of the major functions of the massive bureaucracy of the executive branch is to make life easier for Congress by reducing the things they have to worry about.
The Fed should act as a policy outcome simplifier for Congress. Instead of having to figure out how to achieve a certain nominal target, Congress should only have to specify which target they want and the Fed should implement it without further guidance. If Congress wants inflation to be higher, instead of debating the size of a stimulus package, they would merely need to instruct the Fed to shoot for a higher target. To use a thermostat metaphor, if you want your house to be 75 degrees, you should set the thermostat at 75 rather than trying to figure out how many space heaters you would need to buy to get your house to 75 degrees while leaving the thermostat at 65. When fiscal stimulus advocates say the stimulus should have been bigger, they are saying “More space heaters!!!”, but forgetting that the thermostat will simply offset their efforts, until those efforts reach extreme proportions.
I’ve been reading “Boom and Bust Banking” and the first third or so of the book focuses on banking. The level of complexity of this sort of stuff is insane. But normal people (and Congress) shouldn’t have to care what the financial sector does. Banks don’t determine the inflation rate, unemployment, wages or any other major variable which people care about for business cycles. A bank failure shouldn’t have any implications for the broader economy. Sure, the bank’s stockholders and bondholders will take losses, but we’ve got deposit insurance for the little people. If market monetarism (or any strict targeting regime for that matter) were implemented, politicans could focus on the “micro” effects of policy rather than their “macro” effects. Hayek once said that the curious task of economics is to explain to men what little they know about what they imagine they design. Perhaps the curious task of market monetarists is to explain to men what little they can affect, so what they shouldn’t worry about.