Economics, Pethokoukis

Can Marco Rubio be converted to market monetarism?

At the Jack Kemp dinner last night, Marco Rubio touched briefly on monetary policy:

Sound monetary policy would also encourage middle class job creation. The arbitrary way in which interest rates and our currency are treated is yet another cause of unpredictability injected into our economy. The Federal Reserve Board should publish and follow a clear monetary rule – to provide greater stability about prices and what the value of a dollar will be over time.

Now what Rubio almost surely meant was changing the Fed’s dual employment-inflation mandate into a single mandate focusing on inflation, such as the ECB has. This is the current default GOP position on the Fed. But as Reihan Salam rightly points out, “There is nothing in his address that isn’t consistent with market monetarism” and targeting nominal GDP.

Rules based? Check. Predictable? Check. Transparent? Check. Even better, MM could theoretically create a market-based monetary policy removing all discretion from central bankers. That would truly “end the Fed” — at least as we know it — by creating a 21st century version of the 19th century gold standard. Market monetarism also serves a political function on the right by allowing conservatives to stop the wrong-headed Hebert Hooverization of George W. Bush. It’s time for Marco to start reading Milton.

One thought on “Can Marco Rubio be converted to market monetarism?

  1. I would suggest reading Nobel Laureate Vern Smith instead. Like Robert Hetzel, Smith blames the Fed for the recession — for cutting interest rates in 2001 and setting housing prices on their fateful arc. Hetzel, a favorite of AEI,says the Fed erred by keeping rates too high as the economy approached collapse in late 2007. The difference is more than timing. Smith’s view is that that the markets did it with a Fed assist, that booms and busts are inevitable. Hetzel argues that it was the Fed, period. Thus, Dubya, Wall St and the banks are off the hook. Of course, the markets work. It’s the Fed you see.

    Here is Smith arguing the counterpoint:

    “In every market, there is ultimately only one source of liquidity: buyers. And this is what central bankers hope to see return when they speak euphemistically of “restoring confidence.”

    All other sources of liquidity are stop gaps, bridges, band aids, and now a duct-tape bailout. Every seller in dire need of a buyer is in a liquidity crisis, even if he is a gainfully employed homeowner whose job security requires a move, or a fundamentally solvent bank, holding secured mortgage paper, but in need of immediate cash. Both now find that yesterday’s buyers are in hiding….
    “Starting in 2007, the Fed under Ben Bernanke, did all the right things expected of a central banker facing liquidity problems in the finance/housing sector. He even risked inflation by making it easy for banks to borrow from each other and the Fed. (The dollar did temporarily fall as commodities spiked upward.) But the action failed to solve the problem.”

    So if market monetarism serves a political function on the right, could it be delusion?

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