Mike Konczal and Josh Mason on the Ideal Central Bank

We’re publishing some expert ideas about the future of the ECB and monetary policy. Three days ago some ideas of Willem Buiter were published, two days ago some ideas from Richard Werner and yesterday ideas from Thomas Mayer. Today some excerpts from a recent paper by Mike Konczal and Josh Mason. They are not part of the Handelsblatt Shadowcouncil but their ideas often tally with those already published:

• Pure ‘inflation targeting’ is (mortally?) compromised
• Hence, central banks are overburdened and need to share responsibility for stable economic and financial development with (other parts of) the government
• But there are serious coordination issues (this looms larger in the Eurozone than in the USA) with regard to management of monetary/fiscal policy as well as with regard to macro and micro allocation of credit
• ‘Credit guidance’ (which the government is already doing, think for instance about the deductability of mortgage interest in many countries) has to be rebooted and aimed at long-term productive investment. Opinions differ about the exact shape of this.
• But it does mean that increased democratic and social accountability is important

There are substantial policy questions about the ways in which the Federal Reserve stimulates the economy by hitting the gas pedal or brake, by way of increasing or decreasing the single interest rate, is consistent with larger economic goals, including ensuring financial stability, fostering productive investment and good jobs, and directing society’s resources toward urgent social problems, such as climate change. In particular, we review recent proposals for modifying the inflation target of monetary policy and for allowing the overnight interest rate to move below zero. We explain why we believe these changes to the conduct of monetary policy are not sufficient by themselves to reliably maintain full employment. Finally, in Section Three, we suggest other approaches that we believe the Federal Reserve should explore and adopt as part of their toolkit. Six stand out for us:

1. Setting long-term interest rates
2. Increasing support for public borrowing
3. Purchasing state and local debt
4. Coordinating Treasury and Federal Reserve policy
5. Purchasing a greater range of private debt
6. Shifting from a monetary policy to a credit policy framework

This list is not meant to be exhaustive or definitive, but we hope that it can begin a broader discussion of expanding the scope and scale of interventions by the Fed. The economy’s ability to weather recessions, and to meet human needs even in good times, depends on the Fed getting out of the narrow box it trapped itself in before 2008 and is only just finding its way out of today

[about 6. they state, among other things]

Central bankers like to think of themselves as mere custodians of the financial system, but the social function of finance is to allocate society’s scarce resources among investment projects. Finance is responsible for redirecting economic activity—a role that is especially critical at times when major changes in the direction of activity are necessary. Due to the looming threat of climate change, this is such a time. The terms and availability of finance will be a central factor in determining how (or if ) carbon-based energy sources are phased out; vulnerable coastal communities are protected or relocated; existing structures are refitted to reduce energy use; land use patterns are reshaped to reduce reliance on the automobile; and the scarce resources of water and arable land are developed, allocated, and safeguarded. All of these choices require large, upfront expenditures to generate even larger, but distant and uncertain, returns: in short, what banks are for. These questions, and other similar choices about our collective productive activities, will determine whether our grandchildren continue enjoying rising living standards and social stability, or whether they face a new age of conflict and scarcity. As the ultimate arbiter of credit and finance, the Fed has a central role to play here. Like it or not, the central bank is a central planner, shaping both the character and the level of economic activity. It should embrace this role—and the democratic accountability that goes with it—and exercise itspower toward the public good.